Summary
This proposal seeks to increase the daily borrow limits for FiRM’s DAI, sFRAX, and sUSDe markets.
Background
As part of our ongoing strategy to enhance FiRM’s lending platform and accommodate increasing user demand, the RWG regularly evaluates market parameters such as daily borrow limits, supply ceilings, and liquidation factors. These evaluations are aimed at ensuring a balance between growth, user accessibility, and the stability of the platform.
The current daily borrow limits for the DAI, sFRAX, and sUSDe markets aren’t favorable for efficient rate arbitrage via looping. This limitation hinders users from fully leveraging opportunities to optimize their borrowing and lending strategies on FiRM. To address this and enhance FiRM’s competitiveness, it is necessary to increase the daily borrow limits for these markets.
As of August 21st, 2024:
- The DAI market has $2.79MM in TVL and $2.42MM in borrows, with an average borrow limit of 96.13% and 9 borrowers. This indicates high utilization and suggests that users are comfortable positioning close to the boundaries of the current borrow limit.
- The sFRAX market has $1.95MM in TVL and $820k in borrows, with an average borrow limit of 58.39%, signaling slightly more conservative positions compared to DAI (though one user is currently in the process of building out his position, limited by the daily borrow limit), and 6 borrowers. This suggests growing interest, but with room for more aggressive borrowing, especially considering the higher APY (7.1% vs sDAI’s 6%).
- The sUSDe market has yet to see its first position opened, indicating underutilization that could be addressed by offering more attractive borrowing conditions. A forthcoming integration with Ethena’s SATs program will see a 5x points multiplier added to this market.
Risk Assessment
DAI, sFRAX, and sUSDe are all well-established stablecoins with significant liquidity and adoption across the DeFi ecosystem. Their use as collateral in FiRM is supported by robust market data and deep liquidity pools, making them relatively low-risk assets for lending activities.
sUSDe carries some unique risks due to its redemption mechanism, which has a 7-day lockup period and unlike sDAI and sFRAX where redemptions are instant. For FiRM, this situation poses a risk if the price of sUSDe drops rapidly and outpaces our liquidators’ ability to complete necessary liquidations, perhaps caused by a significant loss in the backing of USDe where the full extent is not immediately known. In such a case, the market could become highly speculative about the true value of USDe, potentially leading to a large disconnect between sUSDe and USDe. However, FiRM is better positioned than most other protocols because we use a Chainlink price feed specifically for sUSDe, unlike others which hardcode USDe to $1.00 and rely on the on-chain exchange rate to sUSDe. This advantage means that in a severe market dislocation, FiRM would likely be first in line to execute liquidations, potentially allowing us to exit positions before the full extent of the price drop materializes, thereby mitigating risk.
Given the strong liquidity profiles of these stablecoins, increasing the daily borrow limits is a prudent step that aligns with user demand while maintaining a manageable risk level for the protocol. By increasing the daily borrow limits, FiRM can better accommodate larger borrowing needs and reduce friction for users seeking to leverage these stablecoins. This adjustment also positions FiRM more competitively against other lending platforms that may offer higher borrowing capacities. Additionally, it enables more efficient rate arbitrage via looping, which can attract sophisticated users and increase overall platform utilization.
Importantly, these proposed increases are supported by the findings from our latest simulations and analyses, which take into account the liquidity profiles of DAI, sFRAX, and sUSDe and show no increased risk to the protocol. The adjustments are designed to maintain the health of the protocol while offering users greater flexibility in their borrowing activities.
Parameter Recommendations
The RWG recommends increasing the daily borrow limits for the following markets:
- DAI market: Increase from 500,000 DOLA to 2,000,000 DOLA.
- sFRAX market: Increase from 500,000 DOLA to 2,000,000 DOLA.
- sUSDe market: Increase from 250,000 DOLA to 1,000,000 DOLA.
The collateral factors, liquidation factors, liquidation incentives, and minimum debt amounts for these markets are recommended to remain unchanged, as they have proven effective in managing risks and maintaining market equilibrium.
The increase in daily borrow limits will allow for larger borrow volumes, making FiRM a more attractive option for users looking to leverage these stablecoins and engage in efficient rate arbitrage.