Summary
This proposal seeks to unpause the CRV and cvxCRV markets on FiRM, Inverse Finance’s fixed-rate lending protocol. The collateral markets for these assets were previously paused due to significant leveraged compromising the integrity of CRV. Recent mass liquidation events have led the RWG to once again evaluate the risk profile of CRV and its derivatives, with findings summarized in this comprehensive risk assessment document. Following this, the RWG approves the request made to reactivate these markets with adjusted parameters presented below.
Background
The CRV market on FiRM was initially launched in March 2023, following a detailed risk assessment by the RWG that highlighted CRV’s robust infrastructure, significant market presence, and utility within the DeFi ecosystem. The initial parameters included a collateral factor of 75% and an initial daily borrow limit of 250,000 DOLA. These settings were designed to capitalize on CRV’s strong market fundamentals while managing potential risks.
In May 2023, the RWG revisited the risk profile of CRV and introduced cvxCRV as a new collateral option. This assessment led to adjustments in the market parameters for both CRV and cvxCRV to better reflect their risk profiles and growing demand. Later on, an st-yCRV market was also introduced to FiRM. However, the landscape began to shift significantly when a certain user took on substantial leveraged positions using his CRV and cvxCRV holdings across multiple lending protocols, including FiRM. At times, these positions collectively exceeded $100M in debt, raising concerns about the protocols’ capacity to handle potential liquidation events without incurring substantial bad debt.
The situation escalated in August, 2023, when certain Curve pools were exploited due to a bug in older versions of the Vyper compiler. The CRV/ETH pool was among those affected, resulting in significant losses and a dramatic decrease in on-chain liquidity for CRV. In response, the DAO voted through pausing new borrows from the CRV, cvxCRV, and st-yCRV markets, as well as reducing the liquidation factors and increasing liquidation incentives in an overall effort to stabilize the protocol and protect it from further risks.
In the months that followed, the RWG conducted several risk assessments to evaluate the risk profile of the paused markets. A December 2023 assessment concluded that the current liquidity and market conditions still warranted maintaining the pause. It wasn’t until June, 2024, when a massive liquidation event occurred due to a sharp decline in the CRV price, that the RWG had a significant data point to re-evaluate the situation. Despite the severity of this event, FiRM processed approximately $6.5M in liquidations in the CRV and cvxCRV markets without incurring any bad debt, demonstrating the effectiveness of the existing market parameters.
These observations have informed the latest risk assessment and the proposed parameters for reactivating the CRV and cvxCRV markets.
Risk Assessment
The RWG has conducted a comprehensive risk assessment for the reactivation of the CRV, cvxCRV, and st-yCRV collateral markets on FiRM. This assessment leverages both quantitative and qualitative methodologies, summarized below, to evaluate current risk levels and derive insights that inform our recommendations.
Collateral Parameterization Model:
- This model maps the interactions between various market parameters such as Supply Ceiling, Collateral Factor, Liquidation Factor, Liquidation Incentive, and Fee. By simulating price impacts for the underlying asset, we can analyze the combined effects of these parameters under various liquidation scenarios. This allows us to fine-tune parameters for optimal performance.
Liquidation Factor Model:
- Using Tenderly, this model simulates total gas spent by a liquidator. It considers variables like liquidation incentives to determine the optimal liquidation factor. This ensures that liquidation processes are cost-effective for liquidators, encouraging their participation and maintaining market stability.
Daily Borrow Limits Framework:
- This framework extracts and analyzes data from the largest liquidity pools of the underlying collateral. By understanding the liquidity pool dynamics, we set daily borrow limits to prevent excessive borrowing and mitigate risks of liquidity crises or market manipulation.
Risk Observer Checklist:
- A weekly deliverable providing a concise overview of key health indicators for Inverse Finance products, including FiRM. It includes sections such as Parameter Modeling with Price Impact Data, Collateral Integrity Checkup, and DOLA Health. This proactive monitoring sets a weekly cadence to updating our models, and thus ensures that parameters can be adjusted promptly based on evolving market conditions.
Conclusion
The RWG’s risk assessment provides a comprehensive analysis of the viability of reactivating the CRV and cvxCRV collateral markets on FiRM. The following settings are derived from detailed simulations and analyses, ensuring robust and resilient market conditions. The focus on liquidation dynamics, considering both max liquidation impact and max profitable liquidation scenarios, confirms that the settings are favorable for liquidators.
We recommend reactivating the CRV market on FiRM with the following parameters:
- Market Ceiling: 3,000,000 DOLA
- Collateral Factor (CF): 63%
- Liquidation Factor: 38%
- Daily Borrow Limit: 500,000 DOLA
- Liquidation Incentive: 10%
- Liquidation Fee: 2%
We recommend reactivating the cvxCRV market on FiRM with the following parameters:
- Market Ceiling: 3,000,000 DOLA
- Collateral Factor (CF): 48%
- Liquidation Factor: 56%
- Daily Borrow Limit: 500,000 DOLA
- Liquidation Incentive: 12%
- Liquidation Fee: 0%
On-Chain Actions
To follow