Moonwell Base - Onboard native USDC as collateral

Proposals Moonwell Improvement Proposal
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Moonwell Base - Onboard native USDC as collateral

Summary

Following up on the launch of native Base USDC on September 5th, we propose onboarding USDC as a collateral asset on Moonwell’s Base deployment.

Due to the market demand and rapid increase in USDC liquidity on Base, we think it appropriate to list the asset as collateral.

Recommendations

We propose launching USDC as collateral with the following parameters:

Asset CF Supply cap Borrow cap IRM Oracle Protocol seize share
USDC 0.8 6M 5M Stable Chainlink USDC / USD 30%

Utilization Borrow rate Supply rate
Base utilization (0%) 0% 0%
Kink utilization (80%) 4% 2.4%
Max utilization (100%) 56% 40.5%

Analysis

KPIs for native USDC on Base, with DAI and USDbC as comparison (as of Sept 6 2023).

Asset Total supply (Base) Circulating supply (Base) Circulating supply (all chains) Bridge -5% liquidity depth (to ETH)
USDC 152M 50M 26B - $1.2M
USDbC 121M 121M 26B Base $1.35M
DAI 24M 23.7M 3.9B Base $1M

DEX liquidity for USDC is currently highly concentrated in Curve 4pool. The pool currently holds over 90% of USDC DEX liquidity on Base. Furthermore, top 10 LPs on Curve 4pool hold ~60% of the liquidity.

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Given these observations, we propose initializing the USDC market with conservative supply and borrow caps as a preventive measure. Caps may be adjusted shortly after launching the market once more pools are bootstrapped with substantial liquidity. Note that the Cap Guardian role allows adjusting the caps without being subject to standard 3-day voting period + timelock.

Here are the proposed caps for USDC, along with current caps for other stable markets as a matter of comparison.

Market Supply cap Borrow cap
USDC (proposed) 6M 5M
USDbC 40M 32M
DAI 10M 5M

Deployment

We also strongly recommend collateral factors to be set at 0 during deployment to mitigate the risk of someone exploiting a known Compound v2 issue (see Hundred Finance exploit).

Steps for safe deployment as proposed by Hexagate are the following:

  • Initialize markets using 0 as collateral factor (no borrowing possible).
  • Burn a small amount of collateral token supply for each market.
  • Set collateral factors for each market as specified
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USDC Recommendation to BASE

With Circle announcing Native USDC being live on BASE chain, Gauntlet is putting forward these risk recommendations for Native USDC:

Risk Parameter Recommendations

Risk Parameters

Parameters Gauntlet Rec
CF 0.8
Supply Cap 10,000,000
Borrow Cap 5,000,000
Protocol Seize Share 0.3

Gauntlet recommends the same Risk Parameters as USDbC for this initial asset listing and will revisit once we can analyze user positions.

IR Parameters

IR Parameters USDC
BASE 0
Kink 0.8
Multiplier 0.05
Jump Multiplier 2.5
Reserve Factor 0.15

Specifications

Global Token Liquidity and Market Stats

USDC
Market Cap $25,872,999,832
Circulating Supply 25,956,537,559
2% Depth (DEX/CEX) $114,860,324

USDC has large market caps and strong tokenomics across global chains. Based market tokenomics, this asset is a “blue chip” asset within the crypto space.

Local On-chain Token Liquidity and Market Stats

USDC
On-chain Circulating Supply 157,005,511
Curve 4pool TVL $1,779,000
25% Liquidity Depth $2,700,000

Curve has created a 4 asset liquidity pool to swap USDC. This is the only liquidity source for USDC on BASE as of this post. As such, we recommended more conservative supply and borrow caps compared to USDbC.

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Supply and Borrow Caps

The primary recommendations for mitigating protocol risk when introducing new assets are the borrow and supply caps. Thus, Gauntlet recommends setting the borrow and supply caps strategically to allow for market growth while minimizing risk to the protocol.

Given that liquidators typically retained stablecoins during liquidations, the supply cap of the USDC poses less of a concern. Based on the on-chain circulating tokens and current usage of USDbC liquidity pool, we recommend the below caps:

Asset Cap Recommendation
Supply Cap 10,000,000 ($10M)
Borrow Cap 5,000,000 ($5M)

With BASE working to faciliate migration of USDbC to USDC, we want to ensure there is adequate cap liquidity for Native USDC holders and users currently utilizing the USDbC liquidity pool to migrate.

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IR Curves

Stable IR Curves (USDC)

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Gauntlet recommends the same IR curves as the other stablecoins, USDbC and DAI.

Status of USDbC

Circle announced that BASE will be working with ecosystem partners to faciliate migration of USDbC to USDC. Gauntlet will not make any recommendations for USDbC at this time but we will continue to monitor USDbC’s on-chain liquidity conditions.

Gauntlet is currently working on USDC.e migration framework for the Arbitrum chain. We can work to utilize this strategy to eventually migrate Moonwell Base users to the native USDC liquidity pool.

Notes

  • 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 and Warden will resolve which supply cap we should move forward on for the initial recommendation.
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Proposal to onboard USDC as collateral on Base is now up for on-chain voting. Moonwell - Lending made simple

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Original on-chain proposal was cancelled due to a wrong setting. A new proposal with correct parameters has been sent on-chain: MIP-B04 - Onboard native USDC as collateral

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