Summary:
This proposal recommends adjustments to the Liquidation Factor and Minimum Debt parameters for selected FiRM markets. These adjustments, informed by the Risk Working Group’s (RWG) detailed analysis, are designed to align with current market conditions, and are a revision to the Proposal #153 which passed through governance on November 3rd, 2023. The objective is to ensure the economic viability of liquidations, all while maintaining an attractive lending environment.
Background:
FiRM’s operational stability and risk mitigation depend significantly on the accurate calibration of collateral parameterization. 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. With regards to the Liquidation Factor and Minimum Debt parameters, these are crucial for managing the protocol’s exposure to market volatility and ensuring that the liquidation system is both responsive and equitable. As a reminder, the liquidation factor determines the maximum amount of debt a liquidator can repay in a single liquidation transaction. The Minimum Debt parameter ensures that borrowed amounts are significant enough to warrant the costs associated with liquidation, thereby preventing inefficiencies and potential system abuse. More on the topic here: FiRM’s New Guard: Minimum Debt Amounts.
Methodology:
The first step in determining the optimal Liquidation Factor for each FiRM market is to estimate the total gas incurred by a liquidator following a three step process;
- Acquire DOLA starting with ETH,
- Perform the liquidation,
- Sell the liquidated asset for ETH.
To collect gas spent for steps one and three, the RWG makes use of Tenderly to simulate swaps on Uniswap or Curve, where appropriate. For step two, liquidations are simulated in forked environments designed to mirror current FiRM borrowers. These three values are then summed, resulting in Tot Gas Used. Each market has an associated Tot Gas Used value unique to the underlying collateral. These are then converted to a Cost of Liquidation, measured in USD, assuming a price of ETH and gas price (in GWEI) that reflects the market conditions at the time of the analysis.
In this revised analysis, we utilized ETH price of $3500 and a gas price of 300 GWEI. In the past these were carried out using an ETH price of $2000 and gas price of 60 GWEI. The revision to the ETH price parameter reflects the current market valuation of ETH. On the other hand, the choice of setting the gas price at 300 GWEI is designed to prepare the protocol for extreme scenarios. It aims to ensure that liquidations remain feasible and economically rational for liquidators even during periods of heightened and prolonged network congestion —a scenario not uncommon when volatility picks up in the crypto markets.
Finally, minimum viable Liquidation Factor for each market is derived from Cost of Liquidation, market Minimum Debt and Liquidation Incentives, and the ETH and Gas price assumptions mentioned above. A safety buffer is added to this value, resulting in our final recommendation for this parameter.
Findings:
The latest RWG analysis has led to recommendations (presented below) for adjusting the Liquidation Factor and Minimum Debt amounts for various markets. These are a direct response to the evolving market conditions and gas price environments that have shifted significantly since the initial analysis carried out in October 2023. It’s important to note with regards to minimum debt adjustments that this will not impact current loans or positions. At the same time, 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.
| Market | Current Liquidation Factor (%) | Current Market Minimum Debt (DOLA) | Proposed Liquidation Factor (%) | Proposed Market Minimum Debt (DOLA) |
|---|---|---|---|---|
| wETH | 28.5% | 2000 | 31.0% | 3000 |
| wstETH | 35.8% | 2000 | 41.0% | 3000 |
| CRV | 20.0% | 2000 | No change | 3000 |
| cvxCRV | 20.0% | 3000 | 32.0% | No change |
| st-yCRV | 20.0% | 2000 | 32.0% | 3000 |
| cvxFXS | 37.1% | 3000 | No change | No change |
| DAI | 57.7% | 3000 | 47.0% | No change |
| CVX | 36.5% | 3000 | 41.0% | No change |
| INV | 20.0% | 3000 | 35.0% | No change |
| wBTC | 54.3% | 3000 | 41.0% | No change |
Conclusion:
The RWG conducts new analyses regularly under the risk observer checklist, ensuring that our market parameters are always aligned with the current market realities. We strive to maintain a secure, resilient, and user-centric lending platform and recognize the dynamic nature of DeFi, which necessitates frequent re-evaluations and fine-tuning to market parameters.
On-Chain:
- wETH: Increase Minimum Debt from 2000 to 3000 DOLA
- wETH: Increase Liquidation Factor from 28.5% to 31%
- wstETH: Increase Minimum Debt from 2000 to 3000 DOLA
- wstETH: Increase Liquidation Factor from 35.8% to 41%
- CRV: Increase Minimum Debt from 2000 to 3000 DOLA
- cvxCRV: Increase Liquidation Factor from 20% to 32%
- st-yCRV: Increase Minimum Debt from 2000 to 3000 DOLA
- st-yCRV: Increase Liquidation Factor from 20% to 32%
- DAI: Decrease Liquidation Factor from 57.7% to 47%.
- CVX: Increase Liquidation Factor from 36.5% to 41%.
- INV: Increase Liquidation Factor from 20% to 35%.
- wBTC: Decrease Liquidation Factor from 54.3% to 41%.