- Title: Decrease UNI, LINK and MATIC Collateral Factors
- Author(s): Seraphim
- Submission Date: 20.06.2022
eIP 12: Decrease UNI, LINK and MATIC Collateral Factors
Simple Summary
This proposal offers to decrease UNI, LINK and MATIC collateral factors to 0.3, 0.3 and 0 respectively.
Abstract
This proposal offers to decrease UNI, LINK and MATIC collateral factors to 0.3, 0.3 and 0 respectively. While these assets still pass the thresholds on smart contract risks, oracle security, decentralisation and volatility, the recent volatility in the market highlighted severe lack of liquidity in the market. According to our simulations, offloading these assets during the current market conditions wouldn’t be seamless. At the same time, there seems limited activity derived from maintaining capital efficient collateral factors on assets beyond USDC, DAI, WETH, WSTETH and WBTC, contrary to the initial expectation.
Motivation
The goal of the proposal is to decrease systemic risks while fostering activity on Euler. UNI, LINK and MATIC as collateral assets have not met the expectations in terms of activity generated, while the current liquidity conditions are increasing the risks of bad debt. I believe it is prudent to disable them as collateral or decrease their collateral factors significantly ahead of DAO launch, and let the community decide to turn them back on if they wish so. This measure does not lead to significant liquidations amongst Euler users.
Implementation
| Contract | Method | Token | Token Name | Token Address | Updates |
|---|---|---|---|---|---|
| governance | setAssetConfig | MATIC | Polygon | 0x7d1afa7b718fb893db30a3abc0cfc608aacfebb0 | collateralFactor:0 |
| governance | setAssetConfig | LINK | Chainlink | 0x514910771af9ca656af840dff83e8264ecf986ca | collateralFactor:0.3 |
| governance | setAssetConfig | UNI | Uniswap | 0x1f9840a85d5af5bf1d1762f925bdaddc4201f984 | collateralFactor:0.3 |
Risk Assessment
Slippage
As of 19June 2022, the market has been experiencing significant volatility:
This has shown up in various corners of the market as seen from troubles at Celsius, 3AC and other firms.
This has also manifested itself in UNI/WETH, LINK/WETH, MATIC/WETH Univ3 pools used as oracles on Euler:
MATIC
LINK
UNI
As can be seen from Euler’s oracle tool, relatively small trades lead to huge market impact on /WETH pairs on Univ3, especially MATIC. While there are different fee pools on Uniswap and more exchanges, most of the DeFi volumes occur on Uniswap and therefore are reflective of potential slippage.
This is also exacerbated by delayed movement of the LP position on Univ3. For eg MATIC/WETH today (19june) …
Versus the beginning of the market rout (31march):
Ideally Euler would avoid a situation like this one on Solend:
https://realms.today/dao/7sf3tcWm58vhtkJMwuw2P3T6UBX7UE5VKxPMnXJUZ1Hn/proposal/HuaL6cDtuNtfnJgvwMnYiZDHVCoLAuDtVFgJD8kYChJ4
Essentially, because the SOL position is so big and it cannot be liquidated, the user can treat Solend as a DEX to swap SOL into USDC at a better slippage than on other DEXes. This means that USDC lenders are going to potentially face the prospect of bad debt.
Lack of Activity
Promoting the mentioned assets to collateral tier has not led to sufficient liquidity. For instance, MATIC deposits have evaporated after liquidity mining rewards had been diverted away from MATIC:
This is because borrowing these tokens has become a small fraction of Euler’s activity, whilst other strategies like 2-way wstETH/WETH trades have become extremely popular.
Downsides
If passed, the governance proposal would lead to lower health factors amongst some users, but no significant funds would be pushed into liquidation territory.
You can check the report on affected users here.
Conclusion
Given the limited upside from maintaining collateral status and possibility of systemic risk stemming from bad debt, we think this change is appropriate given current market conditions.