Summary
This proposal aims to adjust the Liquidation Factor settings for various collaterals in FiRM, Inverse Finance’s fixed-rate lending protocol. These adjustments are designed to enhance the protocol’s resilience and ensure economically viable liquidations under heightened network congestion scenarios. During the latest stress test, despite the very high gas environments, FiRM processed liquidations successfully and incurred no bad debt, demonstrating the protocol’s robustness and effective risk management.
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 revisions are based on a recalibration of our existing framework following the recent August 4th stress test, which made apparent the need to model for a 600 gwei gas base case.
Methodology
Following the methodology used in previous analyses, the RWG has revised the Liquidation Factor modeling to accommodate a 600 gwei gas price base case. This adjustment ensures that liquidations remain feasible and economically rational for liquidators even during periods of heightened network congestion.
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 the latest revision analysis, we utilized ETH price of $3000 and a gas price of 600 gwei. In the past, these were carried out using an ETH price of $3500 and a gas price of 300 GWEI and even before that, 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 600 GWEI is a direct result of observations made during the latest August 4th stress test and 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 and Recommendations
The table below summarizes the recommended adjustments to the Liquidation Factors for various FiRM markets, considering a gas price of 600 gwei and an ETH price of $3000. The RWG recommends changes to the liquidation factor of the INV market be adjusted upwards but not to the full extent the model recommends, and that this be postponed until INV has deeper on-chain liquidity. 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 | Recommended Liquidation Factor (%) | Current Liquidation Factor (%) | Δ from Current Setting (%) |
|---|---|---|---|
| wETH | 40.0% | 31.0% | 9.0% |
| wstETH | 60.0% | 41.0% | 19.0% |
| CRV | 60.0% | 20.0% | 40.0% |
| cvxCRV | 80.0% | 32.0% | 48.0% |
| st-yCRV | 70.0% | 32.0% | 38.0% |
| DAI | 70.0% | 47.0% | 23.0% |
| CVX | 60.0% | 41.0% | 19.0% |
| wBTC | 60.0% | 41.0% | 19.0% |
| st-yETH | 70.0% | 48.0% | 22.0% |
| sFRAX | 70.0% | 50.0% | 20.0% |
| COMP | 60.0% | 41.0% | 19.0% |
| INV | 50.0% | 35.0% | 15.0% |
Conclusion
The RWG’s latest analysis underscores the necessity of these adjustments to maintain FiRM’s operational stability and economic viability of liquidations. By implementing these changes, Inverse Finance will ensure that liquidations can continue to be conducted profitably even under extreme gas price scenarios, thereby protecting the protocol and its users.
On-Chain Actions:
- Update the Liquidation Factor for each market as per the recommended values in the table above.