Gauntlet Risk Parameter Recommendation (6/23/2022)

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

Recommendations:

  • We recommend decreasing ACA’s liquidation ratio from 1.85 to 1.8.
  • We recommend decreasing ACA’s minimum collateral ratio from 2.3 to 2.2.
  • We recommend decreasing DOT’s liquidation ratio from 1.45 to 1.4.
  • We recommend decreasing DOT’s minimum collateral ratio from 1.9 to 1.8.
  • We recommend decreasing KAR’s liquidation ratio from 1.45 to 1.4.
  • We recommend decreasing KAR’s minimum collateral ratio from 1.8 to 1.7.
  • We recommend increasing KSM’s liquidation ratio from 1.3 to 1.35.
  • We recommend increasing KSM’s minimum collateral ratio from 1.6 to 1.7.
  • We recommend decreasing LCDOT’s liquidation ratio from 2.4 to 2.35.
  • We recommend decreasing LCDOT’s minimum collateral ratio from 2.85 to 2.7.
  • We recommend decreasing LDOT’s minimum collateral ratio from 2.9 to 2.8.
  • We recommend increasing LKSM’s liquidation ratio from 1.7 to 1.75.
  • We recommend increasing LKSM’s minimum collateral ratio from 2.1 to 2.2.

Rationale:
Since our last recommendations, VaR has increased from $63k to $478k. All of the VaR comes from three assets: LDOT, LCDOT, and LKSM. LDOT’s VaR has increased from $4k to $66k. LCDOT’s VaR has decreased from $60k to $1k. LKSM’s VaR has increased from $0 to $411k. The other assets (KSM, KAR, DOT, ACA) all have VaR remaining at $0.ACA, DOT, KAR, and LCDOT 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 riskier, so we recommend increasing their liquidation thresholds to reduce insolvency risk. LDOT’s liquidation threshold is currently at an optimal balance of risk and capital efficiency, so we are only adjusting its minimum collateral ratio.

Potential forced liquidations:
Whenever we raise liquidation thresholds, there’s a chance that some users may immediately become liquidatable as a result. For KSM, the riskiest account has a collateral ratio of 1.53, so would not be liquidated by this change at today’s KSM price. For LKSM, the riskiest account has a collateral ratio of 1.94, so would not be liquidated by this change at today’s LKSM price.

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