Review of Gauntlet’s BASE recommendations.
Warden has reviewed Gauntlet’s recommendations and supports the proposal. We also propose further updates on Base deployment to unlock more rETH borrow activity and reduce protocol exposure to DAI market.
Review
- USDC borrow cap increase - USDC on-chain liquidity on Base is healthy enough to support a borrow cap increase from 8.5M to 12M without significantly increasing risk for the protocol to accumulate bad debt.
- cbETH IRM update - We also acknowledge that utilization for LST markets is currently not optimal. We think it is a good measure to apply the proposed IRM change only to cbETH to start with. It will be an opportunity to run an A/B experiment with other LST markets as control group in order to better measure rate elasticity for such market. If results are positive, next step will be to apply the same IRM updates to wstETH and rETH.
- LST collateral factors increase - Proposed collateral factor changes do not significantly increase the risk for the protocol to accumulate bad debt in a worst case scenario. Time available to liquidate each asset a worst historical price drawdown scenario is still well over Warden’s recommended buffer of 60 minutes. The proposed collateral factor increases are a good opportunity to improve markets utility while not significantly increasing risk for the protocol to accumulate bad debt.
Additional Recommendations
- Reduce DAI market usage - Reduce DAI supply-side rewards in order to reduce max recursive yield to 20% APY at 5.5M total supply (current recursive yield is 25% APY at 6.6M total supply, which is more than all other stables). We will follow-up with specific parameters to achieve this target.
- Tighten DAI caps - Reduce DAI supply cap to <75% circulating supply (<5.5M) once usage decreases after above change is rolled out.
- Increase rETH borrow cap - Increase rETH borrow cap from 100 to 200.
- wstETH and rETH IRM updates - If IRM change for cbETH proposed by Gauntlet drives positive impact, we proposed applying the same IRM updates to rETH and wstETH markets as well.
Detailed Analysis
Notable market conditions changes since last update
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rETH borrow cap reached - rETH borrow cap has been filled over the last 3 days by users entering recursive rETH positions. We recommend increasing rETH borrow cap from 100 to 200 to accomodate the sudden increase in demand for borrowing. The proposed borrow cap change does not significantly impact risk for the protocol to accumulate bad debt.
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DAI low circulating supply / high caps usage - DAI circulating supply on Base has decreased by 2M. (9.5M → 7.5M). DAI supply cap is now equal to circulating supply, which is not optimal from a risk perspective. Also, DAI supply and borrow caps are currently used at 90% and 85% respectively. High cap usage hinders our ability to tighten the caps. We will reduce DAI reward rates to reduce recursive yield, which should help decrease cap usage. Once usage starts diminishing, we recommend to gradually lower DAI supply and borrow caps to target <75% circulating supply.
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Improved Native USDC DEX liquidity - USDC DEX liquidity has now reached roughly the same level as USDbC. Increased tradeability allows for more USDC supply and borrow positions to be onboarded with relatively unchanged risk exposure for the protocol.
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Reduced rETH liquidity - rETH liquidity depth on Base has diminished by 50% during the last 30 days. This change does not have significant impact on ability to quickly liquidate sizeable rETH collateral positions. In fact, current liquidity level allows liquidating 10% of the supply cap ($150k out of $1.5M) profitably in a single transaction.
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Low LST markets utilization - Market utilization has been constantly low relative to IRM kink for LST markets over the past month (~15% vs. 45% kink).
Source: Search Markets | Warden Finance - Risk & Analytics for DeFi