Gauntlet’s BASE/Moonbeam/Moonriver Recommendations (2024-01-30)

Proposals
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Review of Gauntlet’s BASE Recommendations (2024-01-30)

Summary

Upon review of Gauntlet’s recommendations, we are in favor of applying the proposed updates. Additionally, we recommend decreasing DAI supply and borrow caps to 4M and 3.45M respectively.

Observations

We have observed the following notable changes in market conditions on Base over the last 30 days:

rETH - Highly concentrated DEX liquidity on Base

rETH DEX liquidity is currently very concentrated on Base, which raises the risk of a sudden increase in slippage, and consequentially increasing the risk of accumulating bad debt when liquidating large postions.

Balancer V2 rETH-WETH Stable currently pool holds 100% of rETH DEX liquidity on Base. Source

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Top 2 EOA LPs in this pool hold 65% of the liquidity. Source

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Given a worst case scenario where 65% of deposits are withdrawn from the pool, slippage for trading rETH may dramatically increase (~200% increase), which will increase the risk of accumulating bad debt when liquidating large rETH supply or borrow positions (>$1M).

DAI - Low DEX liquidity on Base

DAI liquidity on Base has been on a downward trend over the last 30 days. Circulating supply has fallen from 9.5M to 5.5M.

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TVL for DEX pools holding DAI on Base has decreased from 1.5M to 550k over the last 30 days, increasing slippage for swapping DAI for uncorrelated assets by 200%.

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cbETH - Low utilization vs peers

cbETH market utilization has been constantly low over the last 90 days. On the other end, utilization for comparable markets (cbETH and wstETH) has been mostly within optimal range for the same time period.

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wstETH - Growing on-chain liquidity

On-chain liquidity for wstETH has been increasing over the last 30 days (2300 → 3500). TVL for wstETH market on Moonwell has increased from 1.08M to 1.69M.
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Migration from USDbC to Native USDC

USDbC circulating supply (108M → 72M) has been steadily decreasing over the last 30 days in favor of USDC (44M → 217M).

Analysis

We have reviewed Gauntlet’s proposed parameter changes. Per our assessment, the proposed parameter changes do not significantly increase the risk for the protocol to accumulate bad debt.

  • cbETH, wstETH and rETH collateral factor increases
    • Increasing cbETH, wstETH and rETH collateral factors from 0.77 to 0.78 do not significantly increase the risk for the protocol to accumulate bad debt in a worst case price drawdown scenario. Time available to liquidate is well above Warden’s recommendation of 60 minutes in all cases.
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  • wstETH supply and borrow caps increases
    • Demand for lending and borrowing wstETH has increased following up to the increase in supply-side rewards for the market on Jan 27. Per our analysis, current on-chain liquidity for wstETH is sufficient to sustain the proposed cap increase while not significantly increasing the risk of accumulating bad debt. Given current DEX liquidity levels on Base, 20% of wstETH supply cap ($450k) can be liquidated in a single transaction.
  • cbETH IRM updates
    • Per our assessment, the proposed IRM update should be effective at increasing demand for borrowing cbETH given that such demand is elastic to rate.
    • In a scenario where the proposed IRM update does not impact utilization sufficiently, we may considering reducing supply-side rewards for the market. Rewards could be re-allocated to markets that historically have been more elastic to rates and tend to attract borrow activity (i.e ETH, USDC).
  • USDC IRM updates
    • The proposed change should be effective at keeping utilization slightly below kink, which should prevent occasional rate spikes.
    • The same IRM update may be applied to DAI market if proven to be effective at controlling utilization.

Recommendations

  • DAI

    • Warden recommends to keep decreasing DAI supply and borrow caps gradually as market utilization allows over the next few weeks. We recommend keeping the supply cap below 75% of circulating supply (or 3.4M DAI) to reduce risks of accumulating bad debt.
    • At the moment, DAI supply and borrow cap could be realistically decreased to 4M and 3.45M respectively given current utilization.
    • We will keep monitoring on-chain liquidity for DAI and may decrease supply-side rewards for the market if the situation does not improve.

  • rETH

    • Warden recommends not to further increase supply and borrow caps until the on-chain liquidity situation improves. We will keep monitoring the market over the next weeks and provide recommendations if necessary.