Gauntlet makes the following recommendations to optimize for risk and capital efficiency for Karura:
- We recommend lowering the stability fee for KAR from 3% to 2.75%.
- We recommend lowering the liquidation ratio for KSM from 1.4 to 1.35.
- We recommend lowering the minimum collateral ratio for KSM from 1.8 to 1.7.
Rationale: Since we raised liquidation ratios and minimum collateral ratios for LKSM and KAR, VaR has stabilized at ~$2.5M, with $1.5M of that coming from the risk to LKSM and the remaining $1M coming from KAR. Our platform is continuing to ingest data on the risks to LKSM and KAR, and our analysis does not recommend further changes to their liquidation ratios at this time.
KSM, in contrast, has a VaR of 0, indicating low risk. Therefore we’re recommending a lower liquidation ratio and a lower minimum collateral ratio for KSM to improve capital efficiency.
Note that we recommend a lower value (2.75%) for KAR-backed CDPs than CDPs backed by other assets.
Lowering the stability fee can improve user engagement - a lower stability fee can incentivize kUSD minters to prefer using KAR over the other supported collateral types, as well as increase the total amount of kUSD debt outstanding, all else being equal.
In the ideal scenario, this increase in total kUSD minted would more than make up for the lower fee earned on KAR-backed kUSD debt, and, in fact, increase protocol revenue. But do note that this outcome will depend on the real world demand curve of kUSD with respect to the KAR Stability Fee, which can only be quantified empirically. Therefore, we should empirically validate these effects, of a lower KAR Stability Fee over time, before making larger deviations from the stability fee value for the other assets (3%).
The community should use Gauntlet’s Risk Dashboard to better understand the updated parameter suggestions and general market risk in Karura.