Summary:
This proposal is a continuation of our ongoing efforts to bolster the CRV market’s security in the wake of the ongoing weakened liquidity environment. With insights gained from the recent CF reduction from 75% to 65%, Inverse Finance’s RWG is now recommending a further reduction from 65% to 60%. The latest RWG-authored risk assessment can be found here.
Background:
On July 30th, 2023, a series of exploits targeted certain Curve pools due to a bug in older versions of the Vyper compiler. The attack and the ensuing panic left CRV’s on-chain liquidity to levels below where Inverse can safely operate its CRV and CRV-derivative markets on FiRM, prompting a swift and decisive response executed via DAO governance in Proposal 124. These changes have shown to stabilize the markets to a degree, as shown in the market snapshot section for the CRV market below. Our continuous analysis indicates that a further CF reduction to 60% would optimize the market’s resilience against potential future liquidity concerns.
Rationale:
With FiRM we strive to accommodate long-term lending with peace of mind. The RWG acknowledges the sensitive nature of such changes. Parameter changes to markets, especially CF, should ideally be rare and when they occur are done in a manner that minimizes risk of bad debt and user liquidation. We feel this is an opportune time to recommend such a change.
Despite strong public support shown for Curve Finance in the immediate aftermath of the exploit by DAOs, competing protocols, market makers, and funds alike, the CRV market continues to pose a significant risk for FiRM. While the current collateral factor of 65% has improved our security posture, the RWG deems we are still excessively exposed to risks in the face of continued low on-chain CRV liquidity.
CRV Market-related proposals passed through Inverse Finance Governance are presented in the table below. Liquidity figures are from DeFiLlama.
| Proposal # | Date | Action | On-Chain Liquidity |
|---|---|---|---|
| 95 | March 15 | CRV Market Launch | $25M |
| 108 | May 14 | CRV Market Parameter Increases | $32.9M |
| 110 | May 27 | CRV Market Parameter Increases | $35.5M |
| 124 | August 9 | CRV CF Reduction | $33M |
| 127 | August 23 | CRV Market Pause | $27M |
| Present Day | October 2 | CRV CF Reduction | $26.3M |
Reducing the collateral factor from 65% to 60% represents our proactive approach, ensuring that we remain ahead of potential risks. We aim to strike a balance between maintaining sufficient collateralization for borrowers and reducing the protocol’s exposure to CRV’s price fluctuations.
Market Snapshot:
Current (Oct 2nd, 2023)
| CRV (#) | Total Collateral | Debt | Collat. Ratio | Avg Borrow Limit | Positions (#) |
|---|---|---|---|---|---|
| 47,143,760 | $23,548,308 | 7,689,209 DOLA | 306.25% | 50.24% | 1 |
Past (August 4th, 2023)
| CRV (#) | Total Collateral | Debt | Collat. Ratio | Avg Borrow Limit | Positions (#) |
|---|---|---|---|---|---|
| 27,096,228 | $15,440,000 | 7,689,209 DOLA | 200.78% | 66.41% | 1 |
Proposed Changes:
| Current | Proposed | |
|---|---|---|
| CF | 65% | 60% |
| Liquidation Incentive | 10% | unchanged |
| Liquidation Factor | 20% | unchanged |
Subject to successful community governance voting, the CF for the CRV market will be decreased to 60%. Following this adjustment, a reassessment phase will determine any further necessary alterations based on real-time data to the CRV market. Consistent with the earlier policy, no fresh liquidity will be introduced to the CRV market unless there’s a positive shift in the liquidity landscape.
Risk management remains our utmost priority. By learning from past events and making informed adjustments, we actively strive to foster a secure environment for our users. The community’s involvement, insights, and feedback have been invaluable in these efforts.
On Chain Actions:
- Set FiRM CRV Market CF to 60%.
