MIP 52 Apollo Risk Parameter Recs (2023-05-22)

[delz]

Apollo Summary

We recommend the following parameter changes:

• Decrease WMOVR borrow cap from 335,000 to 120,000
• Decrease xcKSM borrow cap from 32,000 to 19,000
• Decrease ETH.multi borrow cap from 1,500 to 700

CF and Borrow Cap Rationale:

Apollo’s VaR is $0 and our recommendations will leave it unchanged. The LaR is $102k and our recommendations will leave it unchanged. USDC.multi, ETH.multi, USDT.multi, WMOVR, FRAX, and xcKSM’s collateral factors are effectively balancing risk and capital efficiency.

Gauntlet analyzes assets’ on-chain liquidity and potential risk of short market manipulation attack to assess borrow cap recommendations. With WMOVR, xcKSM, and ETH.multi’s low borrow cap usage and low liquidity on Moonriver’s DEXes, we recommend to lower their caps to reduce market and exploitation risk to the protocol.

WMOVR, xcKSM, and ETH.multi Borrow Cap Usage

Borrow Cap usage has decreased below 20% for WMOVR, xcKSM, and ETH.multi since last recommendations.

The relative large drop in ETH.multi borrow cap usage can be attributed to the Apollo’s largest borrow position account 0x6fffe084f6413fa400bdb93b951e71e190d5d18a in which they closed their $2.1M ETH borrow position and increased their borrow position in USDC.multi.

WMOVR, xcKSM, and ETH.multi 2% Depth Liquidity

2% Depth represents the sum of the 2% liquidity depth over the unique paths between this displayed tokens and stablecoins (typically USDC, USDT).

These assets 2% depth have decreased significantly since earlier in the year but recent liquidity conditions have been relatively low and flat.

Methodology

This set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets.

Gauntlet’s parameter recommendations are driven by an optimization function that balances 3 core metrics: insolvencies, liquidations, and borrow usage. Parameter recommendations seek to optimize for this objective function. Our agent-based simulations use a wide array of varied input data that changes on a daily basis (including but not limited to asset volatility, asset correlation, asset collateral usage, DEX / CEX liquidity, trading volume, expected market impact of trades, and liquidator behavior). Gauntlet’s simulations tease out complex relationships between these inputs that cannot be simply expressed as heuristics. As such, the input metrics we show below can help understand why some of the param recs have been made but should not be taken as the only reason for recommendation. To learn more about our methodologies, please see the Helpful Links section at the bottom.

Supporting Data

The below figures show trends on key market statistics regarding borrows and utilization that we will continue to monitor:

Top 10 Borrowers’ Aggregate Positions & Borrow Usages

Top 10 Borrowers’ Entire Supply

Top 10 Borrowers’ Entire Borrows

Link to chart

Risk Dashboard

The community should use Gauntlet’s Apollo Risk Dashboard to better understand the updated parameter suggestions and general market risk in Apollo.

Value at Risk represents the 95th percentile insolvency value that occurs from simulations we run over a range of volatilities to approximate a tail event.

Liquidations at Risk represents the 95th percentile liquidation volume that occurs from simulations we run over a range of volatilities to approximate a tail event.

Quick Links

Please click below to learn about our methodologies:

Gauntlet Parameter Recommendation Methodology
Gauntlet Model Methodology

By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.

Next Steps

This will be put up for an on-chain vote by May 23rd.

[coolhorsegirl]

Checks out. I’m all for it. Will be voting YAY!

[WardenFinance]

Summary

Our analysis supports Gauntlet’s proposal to:

• Decrease WMOVR borrow cap from 335,000 to 120,000
• Decrease xcKSM borrow cap from 32,000 to 19,000
• Decrease ETH.multi borrow cap from 1,500 to 700

This proposal is in line with some of the recommendations we made in MIP-50 Artemis Risk Parameter Recs (2023-05-15).

This proposal is a good step to keep the protocol’s borrow caps in line with historical utilization and limit the potential exposure to MOVR, xcKSM, and ETH borrows. We think the MOVR, scKSM and ETH.multi borrow caps could be further decreased in a subsequent proposal if utilization remains stable. As part of our analysis we also highlighted potential improvements that could be made by Gauntlet in the future:

• MOVR, xcKSM, ETH - Decrease kink interest rates to increase utilization.
• MOVR, xcKSM, ETH - Lower borrow caps further as utilization allows.

Governance Parameter Review

As described in our methodology, using customized risk analysis tools we analyze the impacts of the proposed parameter changes.

Proposed changes

• Decrease WMOVR borrow cap from 335,000 to 120,000
• Decrease xcKSM borrow cap from 32,000 to 19,000
• Decrease ETH.multi borrow cap from 1,500 to 700

Test	Details	Results
7.1. Protocol short exposure to underlying assets is manageable	For every market, all of the following trades can be executed with under 5% slippage: #1 Buy 20% of market borrow cap from stables #2 Liquidate the largest market debt position from stables #3 Liquidate the biggest non-recursive debt position	⚠️ WMOVR: Partially pass Max ask size for 5% slippage:     Stable -> WMOVR: $25k     Non-stable -> WMOVR: $30k #1 Slippage to purchase 20% of borrow cap:     Buy amount = 120k WMOVR ($750k)     🔴 Slippage = >60%     Note: Could theoretically be traded in multiple trades. A borrow position of such size could prove risky for the protocol. #2 Slippage to liquidate the largest debt position:     Buy amount = 2.94k MOVR ($18.3k)     🟢 Slippage = 2.2% #3 Slippage to liquidate the biggest non-recursive debt position:     🟢 Same as #2 ⚠️ xcKSM: Partially pass Max ask size for 5% slippage:     Stable -> xcKSM: $15k     Non-stable -> xcKSM: $9k #1 Slippage to purchase 20% of borrow cap:     Buy amount = 3,800 xcKSM ($94k)     🟠 Slippage = 38%     Note: Could be traded in 7 chunks of $15k at <5% slippage. Time to liquidation could be dangerously long for a position of such size. #2 Slippage to liquidate the largest debt position:     Buy amount = 1,680 xcKSM ($41.4k)     🟡 Slippage = 15%     Note: Could be traded in 3 chunks of $15k at <5% slippage #3 Slippage to liquidate biggest non-recursive debt position:     🟡 Same as #2 ⚠️ ETH.multi: Partially pass Max ask size for 5% slippage:     Stable -> ETH.multi: $9k     Non-stable -> ETH.multi: $12k #1 Slippage to liquidate 20% of the borrow cap:     Buy amount = 140 ETH ($250k)     🔴 Slippage = >80%     Note: Could be traded in 20 chunks of $12k at <5% slippage. A borrow position of such size would hardly be liquidatable. #2 Slippage to liquidate largest debt position:     Buy amount = 44 ETH ($78.33k)     🟠 Slippage = 28%     Note: Could be traded in 7 chunks of $12k at <5% slippage #3 Slippage to liquidate biggest non-recursive debt position:     Buy amount = 2 ETH (4k)     🟢 Slippage = 2%, could be liquidated in a single trade

Comments

• The risk of accumulating bad debt given current market usage is low for WMOVR, xcKSM, and ETH.multi. Our analysis demonstrates that all of the currently existing non-recursive positions for these markets can be entirely liquidated with under 5% slippage and in a few transactions.
• Given a theoretical case where the current largest ETH.multi recursive borrower decides to enter a highly leveraged non-recursive borrow position of equal size, the position would be hard to liquidate and could pose a risk for the protocol.
• Also, given an even worst theoretical case where a whale borrows 20% of the borrow cap for xcKSM or ETH.multi markets in a non-recursive manner, such positions could be hard to liquidate profitably in a timely manner.
• We would recommend setting the borrow caps for WMOVR, xcKSM and ETH.multi even lower in the future to mitigate the potential impacts of the scenarios mentioned above.

More information about borrow cap methodology is available in Warden Finance docs.

Recommendations and potential improvements

• Utilization for certain non-stablecoin assets has been relatively low for MOVR (27%), xcKSM (20%), and ETH (10%). Low utilization leads to larger interest rate spreads between borrowers and lenders. We think an area of improvement would be to decrease the kink interest rates from 11.63% to a lower interest rate taking into consideration incentive rewards.

Risk Monitoring

As part of our bi-weekly parameter review process we also monitored the protocol to identify risky accounts. We focused on large ETH.multi, xcKSM and MOVR borrowers to identify accounts that are at risk of liquidation. This analysis also proves useful in the context of decreasing borrow caps for these assets.

ETH.multi Market Overview

Here’s an overview of large ETH.multi borrowers, along with their liquidation prices.

Top 5 ETH.multi borrow positions:

Account	Net worth	ETH positions	Strategy / risk level
0x68f7...3817	$230k	Collateral: $121.42k ETH Debt: $78.43k ETH	Recursive (very low risk)
0xe29a...7f6e	$39k	Collateral: $98.5k ETH Debt: $59.88k ETH	Recursive (very low risk)
0xba22...099c	$8.4k	Collateral: $16.73k ETH Debt: $8.31k ETH	Recursive (very low risk)
0xbadf...17b7	$7.2k	Collateral: $11.17k xcKSM Debt: $4.05k ETH	Cross-currency (low risk) 1.67 health score
0xeb45...5d31	$8.5k	Collateral: $12.72k ETH Debt: $3.95k ETH	Recursive (low risk)

All accounts holding significant ETH.Multi borrow positions are executing low risk strategies, introducing a very small amount of risk for the protocol.

xcKSM Market Overview

Here’s an overview of large xcKSM borrowers.

Top 5 xcKSM borrow positions:

Account	Net worth	xcKSM positions	Strategy
0x31a0...1b93	$65.2k	Collateral: $41k xcKSM Debt: $41k xcKSM	Recursive, with stablecoin buffer (low risk) 1.32 health score
0x6119...fbc0	$162.9k	Collateral: $66.26k xcKSM Debt: $17k xcKSM	Recursive (very low risk)
0x45d6...bb60	$20.5k	Collateral: $38.51k xcKSM Debt: $21.82k xcKSM	Recursive (very low risk)
0xf7ab...5244	$10.5k	Debt: $13,984.96 USDC/FRAX Collateral: $3.44k xcKSM	Cross-currency (low risk) 1.34 health score

All accounts holding significant xcKSM borrow positions are executing low risk strategies, introducing a very small amount of risk for the protocol.

MOVR Market Overview

Here’s an overview of large MOVR borrowers.

Top 5 MOVR borrow positions:

Account	Net worth	MOVR positions	Strategy
0xe7fc...c079	$18.9k	Collateral: $18.13k MOVR Debt: $16.56k MOVR	Recursive (very low risk)
0xbe16...0a65	$24.7k	Collateral: $15.77k MOVR Debt: $15.83k MOVR	Recursive with ETH buffer (very low risk)
0x689c...3a4d	$27k	Collateral: $27.05k USDC Debt: $14.52k MOVR	Cross-currency (medium risk) 1.27 health score
0x0cbe...f432	$11k	Collateral: $24.46k MOVR Debt: $13.4k MOVR	Recursive (very low risk)
0xbe3d...2fee	$12k	Collateral: $25.14k MOVR Debt: $13.06k MOVR	Recursive (very low risk)

All accounts holding significant MOVR borrow positions are executing low risk strategies, introducing a very small amount of risk for the protocol.