Gauntlet makes the following recommendations to optimize for risk and capital efficiency for Karura:
- Raise LKSM’s minimum collateral ratio to 1.9.
The current Value at Risk (VaR) is $1.57M, with 77.1% of that coming from LKSM. Looking at the heatmap of sim runs for LKSM shows that our economic simulations predict non-zero insolvent liquidations at volatilities just 50% above the current measured volatility of LKSM. This primarily is driven by three reasons: (1) many current borrowers have collateral ratios close to the liquidation threshold, (2) price volatility has been relatively high recently, and (3) liquidity is relatively low (the value in the KSM/LKSM pool has fallen from $3.64M on January 26th to $3.37M today). Low liquidity implies high slippage, which can turn individual liquidations into a liquidation cascade. As you can see in the heatmap, with higher volatilities we see more insolvencies.
Raising the minimum collateral ratio prevents users from taking on or updating positions to collateral ratios that are likely to get caught in a liquidation cascade.
The community should use Gauntlet’s Risk Dashboard to better understand the updated parameter suggestions and general market risk in Karura.