Gauntlet makes the following recommendations to optimize risk and capital efficiency for Acala and Karura:
Recommendations:
We recommend decreasing ACA’s liquidation ratio from 1.8 to 1.75.
We recommend decreasing DOT’s liquidation ratio from 1.4 to 1.35.
We recommend decreasing DOT’s minimum collateral ratio from 1.8 to 1.7.
We recommend decreasing KAR’s liquidation ratio from 1.4 to 1.35.
We recommend decreasing KAR’s minimum collateral ratio from 1.7 to 1.6.
We recommend increasing KSM’s liquidation ratio from 1.35 to 1.4.
We recommend increasing KSM’s minimum collateral ratio from 1.7 to 1.8.
We recommend increasing LKSM’s liquidation ratio from 1.75 to 1.8.
We recommend increasing LKSM’s minimum collateral ratio from 2.2 to 2.3.
Rationale:
Since our last recommendations, VaR has increased from $478k to $670k. All of the VaR comes from three assets: LDOT, LCDOT, and LKSM. LDOT’s VaR has increased from $66k to $203k. LCDOT’s VaR has increased from $1k to $120k. LKSM’s VaR has decreased from $411k to $348k. The other assets (KSM, KAR, DOT, ACA) all have VaR remaining at $0.
ACA, DOT, and KAR are all relatively safe from a market risk perspective, so can have their liquidation ratios gradually lowered to improve capital efficiency. LKSM and KSM are relatively more risky, so we recommend increasing their liquidation thresholds to reduce insolvency risk. LDOT and LCDOT’s liquidation thresholds are currently at an optimal balance of risk and capital efficiency.
Potential forced liquidations:
Whenever we raise liquidation thresholds, there’s a chance that some users may immediately become liquidatable as a result. As of today, for KSM, the riskiest account has a collateral ratio of 1.39, so would be liquidated by this change at today's KSM price. That user has borrowed 24.5k aUSD.
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For a second-grade student:
Gauntlet is giving advice to Acala and Karura to make them safer and more efficient. They suggest changing the amount of money needed to be safe when borrowing and lending different types of money. They want to make some things a little less safe and some things a little more safe. They also warn that some people might have to pay back their loans if the changes are made.