[MIP-4] Risk Parameter Updates (2022-10-25) Apollo

Gauntlet makes the following recommendations to optimize risk and capital efficiency for Apollo:

Apollo Recommendations:

  • We recommend increasing ETH.multi collateral factor from 60% to 62%.
  • We recommend increasing USDT.multi collateral factor from 40% to 42%.
  • We recommend decreasing the FRAX collateral factor from 60% to 59.50%.

Our models estimate VaR at $239k and our recommendations will decrease VAR to $230k. Estimated LAR is $880k and our recommendation would decrease to $879k. ETH.multi and USDT.multi are relatively safe from a market risk perspective, so their collateral factor can gradually increase to improve capital efficiency. USDC.multi and xcKSM collateral factors are currently effectively balanced for market risk and capital efficiency. FRAX can be de-risked with a relatively small cost in capital efficiency, so we recommend decreasing its collateral factor to reduce insolvency risk.

Potential Forced Liquidations:
Whenever we lower collateral factors, there’s a chance that some users may immediately become liquidatable as a result. There are a number of accounts that lend and borrow stablecoins and keep their balances just slightly above the liquidation threshold. Reducing the collateral factor of FRAX by 0.5% would push 1 account from just above the collateral factor to just below the collateral factor. The account has a total borrow of $15k USD.

Here is a visualization showing the top borrowers with FRAX collateral with their total borrow balance and estimated borrower usage if the collateral factor was reduced to 59.20%. None of the top 10 will be liquidated.

Here are some trends we wanted to share with the community about what we are monitoring concerning the different assets:

Top 10 borrowers’ Entire Borrows

Utilization Rate Over Time

Helpful Quick Links

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Next Steps

  • Gauntlet to put up on chain proposal

Thank you for this important risk parameter update proposal.

It is always a tough balancing act to manage risk to the entire Moonwell protocol vs. the impact to the individual borrower who might get liquidated if the collateral factor on FRAX is reduced. I hope that the borrower who is close to liquidation is paying attention to governance, and is able to repay or add more collateral prior to a proposal passing.

Moonwell community, please help get the word out. I think we’ve all noticed that since the wind-down of RomeDAO and the removal of bridge support, FRAX liquidity has decreased on Moonriver. The FRAX team informs me that FraxFerry is arriving soon, which should provide a cross-chain transfer capability for FRAX.