Gauntlet Recommendation: Enable ACA as Collateral

Gauntlet makes the following recommendations to enable ACA as collateral with the initial parameters below:

Liquidation ratio: 2.0
Minimum collateral ratio: 2.4
Liquidation penalty: 0.15
Stability fee: 0.0275
Debt ceiling: $5M

ACA is generally more risky than DOT, with a market cap of $167 million compared to DOT’s $20 billion. ACA is also Acala’s treasury asset, meaning that it needs to be auctioned off to cover any insolvent debt. This causes a double price impact when insolvent ACA-backed CDPs have their collateral auctioned, creating additional risk. With this in mind, Gauntlet’s analysis recommends starting ACA with more conservative parameters than those of DOT.

With regard to the Stability Fee, note that we recommend a lower value (2.75%) for ACA-backed CDPs than CDPs backed by other assets. Lowering the stability fee can improve user engagement - a lower stability fee will incentivize aUSD minters to prefer using ACA over the other supported collateral types, as well as increase the total amount of aUSD debt outstanding.

In the ideal scenario, this increase in total aUSD minted would more than make up for the lower fee earned on ACA-backed aUSD debt, and, in fact, increase protocol revenue. But do note that this outcome will depend on the real world demand curve of aUSD with respect to its interest rate, which can only be measured empirically. Therefore, we would like to empirically validate these effects, of a lower ACA Stability Fee over time, before making larger deviations from the stability fee value for the other assets (3%).

We expect to continue to recommend changes to the stability fee, as market conditions (e.g. the market clearing interest rates of comparable stablecoins) and protocol usage (as outlined above) change.

Gauntlet does not assess smart contract, oracle, and other technical risks. Gauntlet has assessed market risk to make the above recommendation to enable ACA as collateral. The Acala Community should be comfortable with smart contract, oracle, and all other technical risks before proceeding to add new assets as collateral on Acala.