Summary:
This proposal seeks to unpause the st-yCRV market, herein out referred to as yvyCRV market, on FiRM, Inverse Finance’s fixed-rate lending protocol. The yvyCRV market, along with CRV and cvxCRV markets, was previously paused due to events, namely significant leverage built up and exploits affecting the Curve ecosystem, which led to an alteration of risk profile of the underlying asset. Following a comprehensive risk assessment by the RWG, this proposal outlines the findings and supports the unpausing of the yvyCRV market with adjusted parameters to ensure the stability and security of our protocol.
Background
yvyCRV, a tokenized version of staked Yearn CRV (yCRV), is one of Yearn Finance’s core products. The yvyCRV market on FiRM was initially launched as part of Inverse Finance’s broader strategy to expand its collateral offerings and attract a diverse user base seeking fixed-rate lending solutions.
In August 2023, the yvyCRV market, along with the CRV and cvxCRV markets, was paused following a series of events that exposed vulnerabilities. The initial trigger was a set of exploits targeting Curve pools, specifically due to a bug in older versions of the Vyper compiler. These exploits significantly impacted the liquidity and stability of CRV, the underlying asset for both cvxCRV and yvyCRV. As a result, the RWG recommended pausing these markets to protect FiRM from potential cascading liquidations and to reassess the risks associated with these collateral types.
Since the market pause, the RWG has continuously monitored the liquidity conditions and concentration, user behavior, and potential risks associated with yvyCRV. The shallow liquidity raised concerns about the market’s stability. An incident in December 2023 highlighted this, when a faulty multisig script inadvertently sold a significant amount of Yearn-owned yCRV, reminding us of the potential for risks associated with operational errors and the importance of robust safeguards.
Despite these challenges, the demand for yvyCRV as a collateral asset remains strong, supported by Yearn’s continued innovation and the ongoing utility of the token within the DeFi ecosystem. It wasn’t until June, 2024, when a massive liquidation event occurred, that the RWG had a significant data point to re-evaluate the situation for both yvyCRV, as well as CRV, and cvxCRV. The latest RWG’s assessment indicates that, with the appropriate risk parameters, the yvyCRV market can be safely reactivated, providing holders with renewed opportunities for fixed-rate lending on FiRM.
Risk Assessment:
Revised Risk Assessment of yvyCRV FiRM Markets (Sep '24)
Since the market’s initial deployment, changes have occurred with yCRV namely an upgrade which allows yvyCRV holders to choose between autocompounding their yields or earning rewards in ycrvUSD, a new rewards vault introduced by Yearn. The RWG, together with the PWG, has decided for the time being to forgo deploying a new market with integration of both staking options into a single escrow, and instead promote the unpausing of the current market which only supports the auto-compounding yvyCRV vault.
The RWG employed a robust risk assessment methodology, focusing on several key models and frameworks to evaluate the current risk profile of yvyCRV:
- Collateral Parameterization Model: This model analyzes the interaction between various market parameters, such as Supply Ceiling, Collateral Factor, Liquidation Factor, and Liquidation Incentive. It uses simulation data derived from price impacts on the underlying asset to ensure that the parameters set are optimal for market performance and risk management.
- Liquidation Factor Model: This model, powered by Tenderly simulations, determines cost-effectiveness in setting the liquidation factor by evaluating total gas expenditure by liquidators. This ensures that the liquidation processes are favorable for liquidators, thereby maintaining the health and stability of the market.
- Daily Borrow Limits Framework: The RWG uses this framework to extract and analyze data from the largest liquidity pools of yCRV. This approach helps set daily borrow limits that mitigate the risks of liquidity crises and market manipulation while ensuring the protocol’s resilience.
- Risk Observer Checklist: A weekly overview provided by the RWG includes key health indicators for FiRM, such as collateral integrity, DOLA health, and parameter modeling with price impact data. This proactive monitoring ensures that the protocol remains adaptable to evolving market conditions, and parameters can be adjusted as needed.
Conclusion:
The RWG’s risk assessment provides a comprehensive analysis of the viability of reactivating the yvyCRV market on FiRM. The following settings are derived from detailed simulations and analyses. The focus on liquidation dynamics, considering both max liquidation impact and max profitable liquidation scenarios, confirms that the settings are favorable for liquidators even in adverse market conditions.
On Chain Actions:
We recommend reactivating the yvyCRV market on FiRM with the following parameters:
Market Ceiling: 400,000 DOLA
Collateral Factor (CF): 48%
Liquidation Factor: 80%
Daily Borrow Limit: 25,000 DOLA
Liquidation Incentive: 12%
Liquidation Fee: 0%