Summary
This proposal seeks to increase the supply ceiling and daily borrow limit parameters of FiRM’s wstETH market to 10,000,000 and 1,000,000 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 wstETH 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 in December 2023, the wstETH market has had one parameter adjustment via governance proposal, an increase to the daily borrow limit parameter. As of May 29th, 2024, the wstETH market is FiRM’s 2nd most utilized market, with $7.16MM in deposits and $3.92MM in borrows, from 9 unique open positions. 3 of the top 7 positions on FiRM are wstETH positions. Users have, on average, a borrow limit of 70.02%. This figure is in line with our predicted user behavior outlined in the original stETH risk assessment document, and in line with our other ETH or ETH-derivative FiRM markets. There have been 0 liquidations in the wstETH market since inception.
Risk Assessment
At this stage, the wstETH market is prime for expansion and the supply ceiling and daily borrow limit are the relevant parameters needing to be assessed. The supply ceiling for wstETH should be established keeping in mind stETH’s on-chain liquidity. Setting an appropriate ceiling mitigates the risk of overexposure and ensures adequate market depth to support redemptions. Careful consideration of the current and historical circulating supply of stETH, along with market conditions, should guide the determination of this limit. Whereas, 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:
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The RWG approves an increase in the supply ceiling from 5,000,000 DOLA to 10,000,000 DOLA.
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The RWG approves an increase in the daily borrow limit from 500,000 DOLA to 1,000,000 DOLA.
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Collateral factor, liquidation factor, liquidation incentive, and minimum debt amounts 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.
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 wstETH market’s Supply Ceiling to 10,000,000 DOLA
- Set FiRM’s wstETH market’s Daily Borrow Limit to 1,000,000 DOLA