Summary
With BASE Mainnet announcing its opening to builders on July 13th in preparation for their mainnet general launch in early August, Gauntlet is excited to move forward with recommendations for Base protocol to help it get initiated. Asset recommendations will be based on risk analysis, taking into account both expected and actual figures. Gauntlet is providing these recommendations in preparation of the upcoming Base protocol deployment to the Base chain, which is scheduled to occur in the near future. To conduct a thorough risk analysis in these assets, Gauntlet requires visibility into the actual on-chain liquidity.
Gauntlet will propose four risk recommendations in this forum regarding the Base protocol under one snapshot vote in which we will have the following options:
- Risk averse w/ Supply/Borrow Cap Guardian
- Risk averse w/o Supply/Borrow Cap Guardian
- Risk tolerant w/ Supply/Borrow Cap Guardian
- Risk tolerant w/o Supply/Borrow Cap Guardian
We coalesce our Asset Risk tolerance and Gauntlet’s Guardian proposal under one snapshot to simplify the voting process and provide clear next steps. Gauntlet’s preferred option would include us as Supply/Borrow Cap Guardian.
Asset Recommendations
Regarding the initial listing of assets on the Base Protocol, Gauntlet presents two options for Collateral Factors to the community. Option 1 is a highly conservative approach aimed at testing the new Base mechanics. The conservatism stems not only from market risk, which is Gauntlet’s primary focus, but also from smart contract and other technical risks. Initially, the collateral factor will be set to 0 for these liquidity pools, with further recommendations to follow once user positions flow into the pools. On the other hand, Option 2 is less conservative and assumes that the community is more risk tolerant, and does not require extensive testing of BASE mechanics on a new chain.
Collateral Factor Options
Option 1 (Risk Averse)
| Asset | USDC | WETH | WBTC | cbETH | wstETH |
|---|---|---|---|---|---|
| Collateral Factor | 0% | 0% | 0% | 0% | 0% |
Option 2 (Risk Tolerant)
| Asset | USDC | WETH | WBTC | cbETH | wstETH |
|---|---|---|---|---|---|
| Collateral Factor | 80% | 75% | 70% | 73% | 73% |
Gauntlet plans to empower the community to choose between the 2 options by submitting a snapshot for community members to decide what collateral factors to list with these liquidity pools during the initialization of the Base protocol.
General Recommendations
Regardless of the options chosen by the community, these parameter recommendations will remain applicable for all options.
Risk Parameters
| Asset | USDC | WETH | WBTC | cbETH | wstETH |
|---|---|---|---|---|---|
| Liquidation Incentive | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 |
| Supply Cap | 40,000,000 ($40M) | 10,500 ($20M) | 330 ($10M) | 5,000 ($10M) | 3,700 ($8M) |
| Borrow Cap | 32,000,000 ($32M) | 6300 ($12M) | 132 ($4M) | 1500 ($3M) | 1110 ($2.3M) |
IR Recommendations
| IR Parameters | USDC | WETH | WBTC | cbETH | wsETH |
|---|---|---|---|---|---|
| Base | 0 | 0.02 | 0.02 | 0.01 | 0.01 |
| Kink | 0.8 | .6 | .6 | .45 | .45 |
| Multiplier | 0.05 | 0.15 | 0.15 | 0.2 | 0.2 |
| Jump Multiplier | 2.5 | 3 | 3 | 3 | 3 |
| Reserve Factor | 0.15 | 0.25 | 0.25 | 0.25 | 0.25 |
Supply & Borrow Cap Guardians Recommendation
Enable Gauntlet as Supply & Borrow Cap Guardian
To enhance risk management and promote efficient growth within the BASE protocol, Gauntlet proposes to serve as Supply and Borrow Cap Guardians, enabling the moonwell community to delegate the authority to adjust caps to our Gauntlet. Within the Moonwell technical docs, it is stated that this Cap Guardian function “is useful if you wanted to delegate the adjustment of the borrow caps across markets to someone who specializes in these sorts of adjustments without giving them administrative access across the rest of the protocol.” As a community participant specializing in these adjustments, Gauntlet recommends being added as Guardian. We seek this guardianship for the following reasons:
- Proactive Cap Adjustments: With this responsibility, we can promptly modify caps in response to market risk events, on-chain DEX liquidity fluctuations, and changes in liquidity pool usage.
- Streamlined Process: Will simplify voting overhead and operations.
- Expedited Recommendations: Gauntlet can recommend borrow and supply cap adjustments without being subject to the standard 3-day voting period and timelock, thereby increasing the speed of implementing cap changes.
If entrusted with Guardian, Gauntlet commits to adhere to the following limitations when making supply and borrow cap adjustments:
- For each asset, only 1 increase is allowed every 5 days.
- The supply cap can never be increased above 100% of the current one.
- The borrow cap can never be increased above 100% of the current one.
Furthermore, Gauntlet will ensure transparency and community engagement by notifying the community of cap changes and providing reasoning through forums.
Specifications
BASE Chain
BASE is a Layer 2 EVM blockchain developed in collaboration with Optimism, utilizing the MIT-licensed OP Stack. The decentralized ecosystem of Base aims to leverage Coinbase’s products and distribution, offering seamless integration with Coinbase, easy fiat on ramps, and access to over 110 million users and more than $80 billion in assets within the Coinbase ecosystem. The potential size of the BASE chain impacts our assumed figures within this recommendation.
BASE has been launched with multiple launch partners which strengthens the perception of future growth of the chain:
Assets’ Market Analysis
Token Liquidity and Market Stats
| Asset | USDC | WETH | WBTC | cbETH | wstETH |
|---|---|---|---|---|---|
| Market Cap | $27,025,323,945 | $227,014,563,721 | $580,763,918,405 | $2,271,743,376 | $4,546,480,365 |
| Circulating Supply | 27,015,257,564 | 120,201,013 | 19,431,943 | 1,154,928 | 2,129,499 |
| 2% Depth (DEX/CEX) | $118,338,331 | $31,590,226 | $13,101,035 | $428,993 | $4,438,157 |
Utilize native asset Market Caps and Circulating Supply for WETH and WBTC. Market Cap and Circulating Supply for staked assets cbETH and wstETH are derived from ETH mainnet data. All recommended assets have large market caps and strong tokenomics across global chains.
When comparing cbETH and wstETH, we observe that cbETH has a relatively lower 2% Depth across multiple centralized and decentralized exchanges. However, we anticipate that cbETH will exhibit greater liquidity and circulating supply on BASE due to its association with Coinbase.
Collateral Factor
To ensure a secure launch and accommodate potential protocol and user position changes, Gauntlet advises adopting either of our conservative collateral factor recommendations. Based on the assets’ Volatility, Max Drawdown, and other lending platforms’ parameters, we recommend these conservative CFs for the non risk tolerant option:
| Asset | USDC | WETH | WBTC | cbETH | wstETH |
|---|---|---|---|---|---|
| Collateral Factor | 80% | 75% | 70% | 73% | 73% |
Base is set to become the first protocol under Moonwell to list staked assets within its liquidity pools. When making asset recommendations for these pools, it is crucial to consider the utilization of recursive staked yield strategies employed by users to optimize their earnings. As such, Gauntlet recommends a conservative 73% CF for the staked assets until we can get more user positions and data within our simulation.
YTD Daily Max Drawdown
30D Volatility
Liquidation Incentive
The Liquidation Incentive is the discount on collateral that a liquidator receives for liquidating a position. This additional collateral given to liquidators is an incentive to perform liquidations and keep the protocol solvent. We recommend a 10% liquidation incentive for Base assets on the protocol. This recommendation is aligned with our model recommended values for Apollo and Artemis and best balances protocol safety and reducing penalizing users in the event of a liquidation.
Supply and Borrow Caps
Borrow and supply caps are the primary parameter recommendations we can make to mitigate protocol risk when listing new assets. Gauntlet recommends setting the borrow and supply caps strategically to allow for market growth while minimizing risk to the protocol. We give supply & borrow cap recommendations based on assumed BASE TVL. It’s hard to predict the proportion of asset market cap proportions to total BASE TVL, so the numbers below are just an approximation. That being said, unlike mainnet Ethereum, we imagine cbETH to have a higher circulating supply than wstETH on BASE, due to the Coinbase relationship. Again, these numbers are dependent on BASE TVL upon launch and may change.
BASE $200M TVL
| Asset | USDC | WETH | WBTC | cbETH | wstETH |
|---|---|---|---|---|---|
| Supply Cap | 40,000,000 ($40M) | 10,500 ($20M) | 330 ($10M) | 5,000 ($10M) | 3,700 ($8M) |
| Borrow Cap | 32,000,000 ($32M) | 6300 ($12M) | 132 ($4M) | 1500 ($3M) | 1110 ($2.3M) |
Relative L2 Chain TVLs
| Chain | TVL |
|---|---|
| Optimism | $2.4B |
| Arbitrum | $5.9B |
| zkSync Era | $572M |
IR Curves
For the IR recommendations, we have classified our curve suggestions into three distinct categories: stable assets, non-stable assets, and staked assets. For stable and non-stable assets, our recommendation aligns with the IR parameters derived from our modeled IR curves on Artemis. This approach ensures consistency and harmonizes the listing of assets with similar characteristics within Moonwell’s ecosystem
As mentioned earlier, Base is set to become the first protocol to list staked assets and our recommendations need to consider the utilization of recursive staked yield strategies employed by users to optimize their earnings. In light of this, Gauntlet advises adopting a more conservative approach with IR parameters for staked assets, featuring a lower kink and higher multiplier.
| IR Parameters | USDC | WETH | WBTC | cbETH | wsETH |
|---|---|---|---|---|---|
| Base | 0 | 0.02 | 0.02 | 0.01 | 0.01 |
| Kink | 0.8 | .6 | .6 | .45 | .45 |
| Multiplier | 0.05 | 0.15 | 0.15 | 0.2 | 0.2 |
| Jump Multiplier | 2.5 | 3 | 3 | 3 | 3 |
| Reserve Factor | 0.15 | 0.25 | 0.25 | 0.25 | 0.25 |
Non-Stable IR Curves (WETH & WBTC)
Stable IR Curves (USDC)
Staked IR Curves (cbETH & wsETH)
Once Base protocol gets more user positions and data, Gauntlet can utilize our internal model to make data-informed decisions around setting borrower and supplier interest rates to reduce risk or increase protocol revenue without materially impacting risk.
Notes
- As the protocol and liquidity evolves and more data becomes available, these parameters may be adjusted accordingly. By incorporating protocol data, user positions and liquidity data in our simulations, we can provide comprehensive risk parameter recommendations.
- If the community opts to initiate a lending pool with collateral factors greater than 0, Gauntlet strongly advises the protocol to establish reserves within the pools as a precautionary measure against a Hundred Finance attack.
Next Steps
- Gauntlet will follow-up with a snapshot on the risk tolerance and Guardianship options on Monday.
- Gauntlet will put up a governance proposal following the snapshots, if necessary.
- Gauntlet will provide on-going recs bi-weekly once BASE is deployed.
