Compound

Simple Summary

A proposal to adjust ten (10) parameters for ten (10) Compound assets.

Background

As planned in an earlier forum post, Gauntlet has updated its dynamic parameter methodology to include recommendations for the reserve factor, as well as our usual parameters. To outline our thinking behind this addition, we split lending parameter optimization into a two step process:

• Balancing losses due to insolvency with capital efficiency
• Balancing the tradeoff between increasing supplier APY and growing reserves to cover insolvency losses

We are now adding a layer to our existing simulation logic that allows us to reflect the second step of lending protocol risk management: building sufficient but not excessive reserves to absorb losses that do occur. Our model assumes the protocol would like to build reserves greater than insolvency losses by a small margin, and includes this as an optimization objective. As reserves are built and losses occur in the simulation, a higher setting for the reserve factor allows us to absorb more losses while maintaining reserve coverage, while a lower setting for the reserve factor would require losses to be managed more tightly.

Full proposal and forum discussion

Motivation and Specification

Recommendations:

We recommend decreasing reserve factors for USDC, USDT, and TUSD from 7.5% to 3.75%, and decreasing all other reserve factors by 500 bps (for example, decreasing ETH reserve factor from 20% to 15%). We previously proposed decreasing reserve factors for 17 total assets, but the maximum number of proposal changes is 10. As a result, we are recommending the 10 most impactful reserve factor decreases, based on expected annual reserves for each asset.

Reasoning:

The one-week rolling average VaR for Compound in a Black Thursday magnitude event is $0.30M.

The protocol has an existing reserve pool of $42.87M, broken down as follows:

The protocol is expected to build reserves at a $3.86M annual rate should the reserve factors remain unchanged, broken down as follows:

Since the existing pool and growth rate are more than sufficient to cover a very severe loss event, our analysis shows that the optimal level of reserve factors is well lower than they are currently. By implementing the recommended cuts, the protocol could reduce its estimated annual reserve growth rate from $3.86M to $2.33M, reallocating $1.53M of funds to suppliers and thus incentivizing more users to lock collateral in Compound.

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