Proposal to reduce CF, increase liquidation incentives in FiRM CRV + Derivatives Markets

Summary:

This proposal seeks to address the current risk profiles of the CRV, cvxCRV, st-yCRV, and cvxFXS markets on FiRM following a sudden liquidity crisis. Changes to the CF and liquidation incentive for the three markets are recommended by the RWG and detailed below.

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 bug allowed attackers to drain affected pools of their tokens, resulting in losses for liquidity providers. The exploit was specifically focused on pools paired with native ETH. The pETH, msETH, and alETH LPs were all affected, exploiting the reentrancy bug, for a total loss of ~$45.6M. More relevantly to Inverse, the CRV/ETH Pool was exploited twice, where firstly the attacker profited ~$19.6M through an arbitrage exploit and later on a whitehat returned ~$5.4M to Curve. This attack and the ensuing panic has left CRV’s on-chain liquidity to the lowest levels seen, and far below levels where we can safely operate our CRV and derivative markets on FiRM, prompting a swift and decisive response. A snapshot of these markets taken August 1st is posted below:

Market Total Collateral Debt Collat. Ratio Avg Borrow Limit Positions (#)
cvxCRV $16,010,000.00 $4,030,000.00 397.27% 50.34% 13
CRV $15,440,000.00 $7,690,000.00 200.78% 66.41% 1
cvxFXS $1,700,000.00 $423,360.00 401.55% 49.81% 6
st-yCRV $278,980.00 $68,230.00 408.88% 48.91% 6

Proposed Changes:

Market CF Liquidation Incentive
CRV 75% to 65% N/A
cvxCRV 50% to 48% 10% to 12%
st-yCRV 50% to 48% 10% to 12%
cvxFXS 50% to 48% 10% to 12%

Implementation Plan:

  1. Upon successful community governance voting, CF and liquidation incentives for the CRV, cvxCRV, st-yCRV, and cvxFXS markets will be lowered to the amounts shown in the table above.
  2. Once the first proposal is successfully executed, a subsequent proposal will be posted after a period of observation and assessment of the on-chain liquidity for CRV and the protocol’s performance with the initial changes.This second proposal may seek to further reduce the CF of the CRV market to 55% and will include any other changes necessary to secure the CRV, cvxCRV, st-yCRV, and cvxFXS markets.
  3. No new liquidity will be issued to the aforementioned markets so long as the liquidity picture for the collaterals remains unchanged. Furthermore, any new liquidity made available by borrowers repaying their loans will be promptly removed from FiRM. Any deviation away from this policy will be at the discretion of the Fed Chair.

Rationale:

  1. The CRV market has been identified as a significant risk factor for FiRM. While the current collateral factor of 75% allows borrowers to leverage their CRV holdings, it also exposes the protocol to excessive risks in the face of the recent decrease in on-chain CRV liquidity. By reducing the collateral factor from 75% to 65%, we aim to strike a balance between maintaining sufficient collateralization for borrowers and reducing the protocol’s exposure to CRV’s price fluctuations.

The phased approach to further reduce the CF to 55% in a subsequent proposal is essential for careful risk management. Gradual adjustments provide borrowers with time to adapt and the protocol to adjust for changing market conditions and ensure that the reduction in CF does not create sudden shocks to the system. The progressive decrease in the CF will also allow us to monitor the impact of each adjustment and make informed decisions based on real-time data.

  1. The cvxCRV, st-yCRV, and cvxFXS markets are considered to be more volatile compared to CRV and FXS as pricing volatility is amplified by peg fluctuations. These markets are also reliant on price oracles tied to shallower LPs. In the aftermath of the July 30th exploit, peg for cvxCRV fell as low as 88%, and yCRV to 83%. While these values didn’t mark historic lows for the assets, the backing (CRV in the LPs) of each was at minimal levels and low enough to jeopardize any attempt of a smooth liquidation process. The liquidity picture for cvxFXS was also indirectly affected by these events. By lowering the collateral factor from 50% to 48%, we seek to enhance the safety buffer against potential liquidity crises.

To further facilitate the liquidation process, this proposal will increase liquidation incentives for the cvxCRV, st-yCRV, and cvxFXS markets from 10% to 12%. This serves multiple purposes. It further incentivizes liquidators to act promptly and efficiently when a borrower’s position falls below the liquidation threshold while also attracting more active participation from the community, increasing the pool of potential liquidators. A diverse and active liquidator pool enhances the decentralization of the liquidation process and reduces the potential for any single entity to manipulate or dominate the liquidation market.

Overall, these changes reduce the risk of bad debt and help ensure that the protocol can recover the maximum value from these collaterals in the event of liquidations in a timely manner.

Risk Mitigation and Community Involvement:

De-risking FiRM is a critical objective, and we take the responsibility of managing risks seriously. We acknowledge that risk management is a continuous process, and we value the input and insights from our community members. By actively engaging with the community and considering alternative proposals and suggestions, we aim to implement the most effective risk mitigation strategies for FiRM.

By reducing the collateral factors for CRV, cvxCRV, st-yCRV, and cvxFXS markets and increasing liquidation incentives, we are taking decisive steps to de-risk FiRM and enhance the protocol’s resilience in the face of further market fluctuations. Together, let’s shape the future of FiRM and Inverse Finance, making it a robust and trusted platform for decentralized fixed-rate lending.

On Chain Actions

  • set FiRM CRV Market CF to 65%
  • set FiRM cvxCRV Market CF to 48%
  • set FiRM st-yCRV Market CF to 48%
  • set FiRM cvxFXS Market CF to 48%
  • set FiRM cvxCRV Market Liquidation Incentive to 12%
  • set FiRM st-yCRV Market Liquidation Incentive to 12%
  • set FiRM cvxFXS Market Liquidation Incentive to 12%
1 Like

good proposal, team should get it up for voting asap and implement this

We never had a liquidation event so far on mainnet, did we?

Also I wonder if the protocol could blacklist the wallets involved in the hack?

Only 2 test liquidations.

Liquidations can be seen there:

Blacklisting an EOA address is not possible in FiRM.

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Proposal has been posted to Gov Mills - Inverse Finance - Draft Details

Mentions and on-chain actions relating to the cvxFXS market have been omitted and will be considered separately in a standalone proposal.

1 Like