Background
As part of our ongoing efforts to enhance FiRM attractiveness as a lending platform, the Risk Working Group (RWG) periodically advises on proposed adjustments to market parameters. These adjustments, which may include changes to daily borrow limits, liquidation factors, and market supply ceilings, are meticulously evaluated by the RWG. The goal is to strike a balance between attracting new users and maintaining the platform’s stability and security.
The INV market has emerged as a key focus, warranting a reevaluation of its parameters to align with the latest market conditions and risk profiles. Since its inception, the INV market has yet to undergo a parameter adjustment via governance proposal. As of March 29th, 2024, the INV market is FiRM’s 9th most utilized market, with $6.81M in deposits ($14.63M in total including staked INV) and $350k in borrows, and ranked 1st in unique open positions, 17. INV FiRM users also have, on average, a borrow limit % of 20.25%, the lowest amongst collaterals. This figure is in line with our predicted user behavior outlined in the original INV risk assessment document.
Risk Assessment
The recent in-depth assessment by the RWG, which can be accessed here, presents an analysis of the market’s current state, the strengths and weaknesses of INV as a collateral option, risk factors, and proposed parameter adjustments. Key highlights of the assessment include:
Methodologies:
- A comprehensive asset scoring model evaluates the risk of assets using various factors such as market capitalization, trading volume, price volatility, token distribution, project fundamentals, and token utility.
- RWG Risk Assessments aim to identify, evaluate, and prioritize risks associated with specific entities or protocols to inform risk management strategies.
- Liquidity analysis including liquidity pool breakdowns indicate the DAO holds ~92% of INV on-chain liquidity via it’s PoL. This liquidity can be assumed to be sticky, and guarantees baseline on-chain depth for INV.
- Recent price impact simulations indicate improvements in price impact compared to previous snapshots. However, concerns remain regarding potential liquidation cascades, necessitating appropriate parameter adjustment considerations.
Parameter Recommendations:
- The RWG approves an increase in the supply ceiling from 350,000 DOLA to 420,000 DOLA. Modeling scenarios under stringent conditions justifies the proposed increase in the supply ceiling to avoid potential liquidation cascades.
The RWG recommends raising the liquidation incentive from 10% to 12% to incentivize more liquidators. Increasing the liquidation incentive aims to encourage more liquidators to participate in the liquidation process.- The minimum debt amount is proposed to increase from 2000 to 3000 DOLA (in line with all other FiRM markets) to increase the likelihood of profitable liquidations for smaller positions and easen the dependency on the TWG to perform smaller liquidations. Note: this won’t affect any current borrows.
- Collateral factor, liquidation factor, liquidation incentive, and daily borrow limit are recommended to remain unchanged due to their effectiveness in managing risks and maintaining market equilibrium.
The recommended changes are designed to have no adverse impact on the protocol’s ability to conduct profitable liquidations or increase the risk of liquidation cascades, as per the findings from the FiRM collateral parameter modeling. The RWG emphasizes continuous monitoring and adaptation to the evolving DeFi landscape to ensure effective risk management strategies.
Conclusion
The proposed parameter adjustments for the INV market are a strategic response to its evolving risk profile and market conditions. These changes are designed to optimize the market’s performance on FiRM, balancing growth opportunities with risk mitigation, and underlining our commitment to market stability and user security.
On-Chain Actions
- Set INV market’s Supply Ceiling to 420,000 DOLA
Set INV market’s Liquidation Incentive parameter to 12%- Set INV Minimum Borrow Amount parameter to 3000 DOLA