Gauntlet makes the following recommendations to optimize for risk and capital efficiency for Karura:

Karura Recommendations:

• Raise the minimum collateral ratio for LKSM from 1.9 to 2.0.
• Lower the minimum collateral ratio for KSM from 1.9 to 1.8.
• Lower the liquidation ratio for KSM from 1.5 to 1.4.

Rationale:

Since last week, VaR (Value at Risk) has increased from $1.77M to $2.41M, with 71.2% coming from LKSM, 28.8% from KAR, and 0% from KSM. kUSD issuance is up slightly from 5.6M to 5.7M. KSM annualized volatility is up slightly from 119% to 122%. The 7-day $ADV is down from $31.6M last week to $17.8M today.

Our economic risk simulations show a high potential for insolvency in LKSM if volatility were to double or triple from its current levels. Raising the minimum collateral ratio will prevent users from taking on additional risk. KSM has the opposite issue: there are zero insolvencies in any of our sims at any level of volatility. This is a sign that it is safe to lower collateral and liquidation ratios to improve capital efficiency.

Dashboard:

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