Proposal to Introduce Minimum Debt Amounts and Adjust Liquidation Factor in FiRM Markets

FiRM
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Proposal to Introduce Minimum Debt Amounts and Adjust Liquidation Factor in FiRM Markets

Summary:

This proposal aims to implement market-specific minimum debt amounts and adjust liquidation factors in FiRM markets to enhance the protocol’s security and user experience. The proposal outlines the rationale behind this feature, its benefits, and the methodology used by the RWG to drive the recommendation.

Background:

In lending protocols like FiRM, the management of borrow positions is a critical aspect of ensuring the system’s stability and security. Borrow positions are created when users borrow assets against their collateral, and these positions must remain liquidatable to protect the interests of both borrowers and lenders. Presently on FiRM, users have the flexibility to establish debts of any size. While this flexibility empowers users, it introduces potential challenges related to the profitability of liquidations, especially in scenarios with high gas prices.

Solution:

A mechanism that would guarantee the profitability of liquidations, even in high gas environments, would address these concerns. Enter Market-Specific Minimum Debt Amounts. Each market can now independently set a minimum debt threshold, providing a clear safeguard against unprofitable liquidations and low-value debts. The proposed solution is a shift in responsibility of maintaining a healthy debt size from the borrowController to the Market contracts. When a user initiates a borrow transaction, the market will now check that the borrow amount, when added to their existing debt, exceeds the minimum debt threshold specific to that market.

Inverse Finance’s RWG has conducted a comprehensive analysis to determine minimum market-specific minimum debt amounts that guarantee a profitable liquidation, assuming the liquidation occurs with an assumed Gas Price (in GWEI), and at a given price of ETH. This involved simulations to estimate the gas spent by liquidators and converting it into a cost of liquidation in USD. From there, a subsequent analysis was conducted assuming a fixed minimum debt amount (either 2000 or 3000 DOLA for each market) in order to determine a minimum viable liquidation factor for each market that still satisfies our need for smooth liquidations. This provided a data-driven foundation for determining new Liquidation Factors for each FiRM market.

Findings:

  • Minimum debt amounts of 2000 or 3000 DOLA is recommended, depending on the individual market and its estimated cost of liquidation.

  • The resulting new Liquidation Factors are on average lower than what’s presently set. five of the ten markets would see reductions, leading to a better user experience for users of said markets. The remaining 5 (CRV, cvxCRV, st-yCRV, DAI, and INV) would see increases, and be further secured as a result. However, given borrowing in CRV, cvxCRV, and st-yCRV markets is paused, the RWG would opt to leave parameters for these unchanged. The RWG also recommends changes to the liquidation factor of the INV market be postponed until INV has deeper on-chain liquidity.

On-Chain Actions:

  • Set MinimumDebt for wETH, stETH, CRV, st-yCRV, and INV markets to 2000 DOLA
  • Set MinimumDebt for gOHM, cvxCRV, cvxFXS, DAI, and CVX markets to 3000 DOLA
  • Set Liquidation Factor for wETH Market to 28.5%
  • Set Liquidation Factor for stETH Market to 35.8%
  • Set Liquidation Factor for gOHM Market to 32.6%
  • Set Liquidation Factor for cvxFXS Market to 37.1%
  • Set Liquidation Factor for DAI Market to 57.7%
  • Set Liquidation Factor for CVX Market to 36.5%
1 Like
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Looks good, one ask:

Can you define and differentiate “liquidation factor” and “liquidation incentive” into as simple of terms here as possible for anyone reading who might want context? Noticed it missing from docs too so if someone doesn’t know the system its a barrier to understanding

Best

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For sure. In a few words:

Collateral Factor (CF): Percentage that represents the maximum borrowing power of a specific collateral.

Liquidation Factor (LF): Percentage of said collateral that can be liquidated in one liquidation.

Liquidation Incentive (LI): Bonus percentage for liquidators to liquidate short-falling loans.

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Just to correct the Liquidation Factor definition: it is the maximum percentage of debt that can be repaid in a liquidation event.

So for example, with a collateral that has 30% CF, but 50% liquidation factor (and 10% liquidation incentive):

A user with $10k collateral and $3001 debt becomes liquidatable. A liquidator can liquidate any debt amount up to $1500.50; let’s assume they do the maximum. At 10% liquidation incentive, the liquidator will be repaying 1500.50 of DOLA debt, and seizing $1500.50 + 10% collateral, which is $1650.55.

So, in the end, the user is left with $8349.45 collateral and $1500.50 debt. So only 16.5% of the collateral was liquidated, while 50% of the debt was repaid in the liquidation.

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Adjusted Proposal writeup to reflect core team consensus on analysis.