Summary
This proposal seeks to increase the collateral factor and daily borrow limit parameters of FiRM’s sFRAX market to 90% and 500,000 DOLA respectively.
Background
As part of our ongoing efforts to enhance FiRM attractiveness as a lending platform, the Risk Working Group 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 sFRAX market, first introduced in May, warrants a reevaluation of its parameters to align with the latest market conditions and risk profiles. Since inception, the sFRAX market has yet to undergo a parameter adjustment via governance proposal, having completed its soft launch timeline requirement. As of June 10th, 2024, the market has one sole borrower, with $9.14k in deposits and $3.14k in borrows. This user has a borrow limit of 42.27%. There have been 0 liquidations in the sFRAX market since inception. All in all, there is insufficient data to draw conclusions from the market and to compare it with our predicted user behavior outlined in the original sFRAX risk assessment document.
Risk Assessment
In order to realize its full potential, the sFRAX market is prime for expansion and the collateral factor and daily borrow limit are the relevant parameters needing to be assessed. The collateral factor for sFRAX must reflect its volatility and the diversification of underlying assets. A balanced collateral factor ensures that the lending protocol remains adequately collateralized, even during market downturns. This factor should be set by analyzing the historical price stability, on-chain liquidity, and risk profile of FRAX, as well as Frax Finance’s assets and liabilities.The daily borrow limit should be set to balance user demand with the protocol’s capacity to sustain withdrawals without affecting the underlying yield strategies adversely. Analyzing daily transaction volumes and liquidity patterns can inform a prudent borrow limit.
The interaction between the various market parameter settings are complex and often non-linear. Our in-house models provide valuable insights into these dynamics, enabling us to fine-tune the parameters for optimal performance. When modeling for parameter values, we value above all else that current settings are generally favorable for liquidators. This is crucial as active liquidator participation is essential for the health of the protocol. At the same time, analysis should also suggest that parameters we decide on are such that liquidation cascades are extremely unlikely given present-day on-chain liquidity and competitive markets.
Parameter Recommendations:
-
The RWG approves an increase in the collateral factor of the sFRAX market from 80% to 90%.
-
The RWG approves an increase in the daily borrow limit from 250,000 DOLA to 500,000 DOLA.
-
Supply ceiling, liquidation factor, liquidation incentive, and minimum debt amounts are recommended to remain unchanged due to their effectiveness in managing risks and maintaining market equilibrium.
Conclusion
As always, a meticulous approach toward parameter settings is crucial to ensure stability and risk mitigation in the protocol. The RWG utilizes both quantitative and qualitative measures to come up with market parameter recommendations. 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 FiRM’s sFRAX market’s Collateral Factor to 90%
- Set FiRM’s sFRAX market’s Daily Borrow Limit to 500,000 DOLA