Simple Summary
Gauntlet recommends the following risk recommendations to the protocol:
Cap Recommendations:
- Increase WETH’s Supply Cap from 12,500 to 25,000
- Increase WETH’s Borrow Cap from 10,600 to 21,200
Current WETH supply cap is at 48% utilization, indicating strong demand that existing caps could constrain. Doubling both the supply cap and borrow cap (to 25,000 and 21,200 WETH, respectively) alleviates these constraints, encourages organic market growth, and accommodates increasing user activity.
LLTV Parameter Recommendations:
Euler’s Dutch auction mechanism enables highly efficient liquidations, and current supply levels for WETH, WBTC, USDC, and USDT remain relatively low as the protocol gains traction. Gauntlet’s simulations project minimal insolvency risk and low Value at Risk (VaR), supporting a more aggressive approach to capital efficiency. Accordingly, we recommend raising the LLTV parameters as follows to promote higher borrowing demand and utilization:
- WBTC/USDC: Increase LLTV from 75% to 82%.
- WBTC/USDT: Increase LLTV from 75% to 82%.
- WETH/USDC: Increase LLTV from 85% to 87%.
- WETH/USDT: Increase LLTV from 85% to 87%.
These increases aim to enhance capital efficiency, and past market downturns have demonstrated that liquidations of WBTC and WETH collateral remain effective, indicating the protocol can tolerate higher LLTV thresholds without incurring undue risk. Furthermore, Euler’s ramp duration mechanism offers flexibility to scale back LLTVs if market conditions deteriorate, providing an added layer of security for the protocol and its users.
Interest Rate Curve Recommendations:
- USDC & USDT:
- Lower Borrow APY at Kink from 9.42% to 6%.
- Lower Max Borrow APY at 100% Utilization from 101.38% to 70%.
- WETH:
- Lower Borrow APY at Kink from 2.79% to 2.5%.
- Lower Max Borrow APY at 100% Utilization from 122.5% to 80%.
Lowering the kinked borrow rate from 9.42% to 6% and reducing the max borrow APY from 101% to 70% in the USDC and USDT markets aligns with current DeFi conditions, mitigates rate volatility above the kink, and incentivizes moderate utilization. Similarly, decreasing the WETH kinked borrow rate from 2.79% to 2.5% and the max borrow APY from 122.5% to 80% helps calibrate interest costs to market demand, discouraging liquidity crunches at high utilization while still protecting lenders.
Next Steps
- Welcome feedback from the community