Gauntlet makes the following recommendations to optimize risk and capital efficiency for Acala and Karura:
- We recommend decreasing the ACA minimum collateral ratio from 2.1 to 2.05.
- We recommend decreasing the DOT liquidation ratio from 1.35 to 1.3.
- We recommend decreasing the DOT stability fee from 3.0% to 2.75%.
- We recommend increasing the KSM liquidation ratio from 1.45 to 1.5.
The VaR is $2.7M, and our recommendations will leave it unchanged. ACA has a VaR of $824k. KAR has a VaR of $729k. LCDOT has a VaR of $381k. LDOT has a VaR of $262k. LKSM has a VaR of $495k. DOT and KSM both have a VaR of $0.
DOT is relatively safe from a market risk perspective, so can have its liquidation ratio gradually lowered to improve capital efficiency. KSM is relatively riskier, so we recommend increasing its liquidation ratio to reduce insolvency risk. ACA, KAR, LCDOT, LDOT, and LKSM’s liquidation ratios are currently at an optimal balance of risk and capital efficiency.
As background, we have observed a general downward trend in lending interest rates across DeFi. In line with this, we recommend lowering the DOT stability fee. For further context, lending rates for DAI and USDC on Ethereum mainnet have fallen below 2% for major DeFi lending platforms reflecting lower demand for leverage than we have seen historically.
Potential Forced Liquidations:
Whenever we raise liquidation ratios, there’s a chance that some users may immediately become liquidatable as a result. However, as of our latest data, there were no borrowers with KSM collateral ratios below 1.79, so we do not anticipate any immediate risk-off liquidations due to this parameter change.
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