Gauntlet's Risk Recommendation - Lower USDbC Cap on BASE (2023-10-25)

Proposals
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Simple Summary

Gauntlet will use Cap Guardian to lower Supply Cap on USDbC:

Current Recommended
Supply Cap 10,000,000 5,000,000

Gauntlet will be utilizing the Cap Guardians to enact this change as voted by the community within this forum post and proposal.

Supporting Data

As a precaution to the eventual migration to native USDC tokens as stated by Circle, we are lowering the caps which should increase cap usage from 21% to 42%.

Current Recommended Current Balances Current Usage Recommended Usage
Supply Cap 10M 5M 2.1M 21% 42%

Decreasing the caps should not impact growth and capital efficiency of USDbC.

Gauntlet has been monitoring USDbC on Moonwell BASE market. USDbC supply cap usage has decreased to ~20% since our previous supply cap recommendation and continue to trend at those levels:

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Circulating supply of USDbC within the BASE ecosystem has continued the downward trend since the deployment of native USDC:

USDbC Circulating Supply on BASE

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Guardian Supply Cap transaction has been implemented.

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Summary

Warden has reviewed Gauntlet’s recommendation to reduce USDbC supply cap from 10M to 5M. We are in favor if applying the changes and also wanted to share some observations regarding market conditions on Base at the moment.

USDbC / USDC

  • Given the suggested supply cap of 5M, the probability for the protocol to accumulate bad debt in a worst case scenario is very low.
    • Current DEX liquidity levels for USDbC allow trading >2M USDbC at 5% slippage.
    • A collateral position of ~2M USDbC (40% of suggested supply cap) could be liquidated profitably in a single transaction. This is well within the recommended tolerance of at least 20% of supply cap per our methodology.
  • We recommend against applying any hard deprecation measures for USDbC at the moment. (i.e increase reserve factor, steep IRM, decrease collateral factor, tight supply and borrow caps, …)
    • DEX liquidity level for native USDC isn’t yet matching USDbC.
    • Most liquid DEX venue on Base for USDC or USDbC still remains Aerodrome USDbC/WETH pool by far.

Native USDC Liquidity Profile

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USDbC Liquidity Profile

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Aerodrome WETH/USDbC

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DAI

  • Total borrows for DAI market has increased by 1.1M (700k → 1.8M) in the last 30d. Borrow and supply caps still provide sufficient room for growth.
  • DAI liquidity on Base hasn’t moved significantly in a way that would necessitate updating caps.
  • We recommend keeping the same caps at the moment

ETH

  • Supply and borrow activity remained relatively stable and well within caps during the last 30 days.
  • ETH liquidity on Base hasn’t moved significantly in a way that would necessitate updating caps.
  • We recommend keeping the same caps at the moment

cbETH

  • Supply and borrow activity remained relatively stable and well within caps during the last 30 days.
  • cbETH liquidity on Base hasn’t moved significantly in a way that would necessitate updating caps.
  • We recommend keeping the same caps at the moment
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