We propose to update some of the protocol’s governance parameters in order to make Notional’s collateralization parameters more aggressive. This set of parameter updates would enable users to collateralize their debts with less collateral and would also make it less penalizing for accounts that get liquidated.
We believe this update is appropriate as Notional’s governance parameters were set to be very conservative following the launch of v2. This update would make Notional more competitive and more in line with other lending protocols. Moreover, with the recent market turmoil, Notional’s liquidation infrastructure got its first test and managed to successfully liquidate all risky accounts just as intended. With this in mind, we believe it is an appropriate time to lower the protocol’s liquidation discounts and collateral ratios.
More specifically, this proposal intends to:
- Increase the ETH exchange rate haircut from 0.75 to 0.78 and decrease the ETH exchange rate buffer from 1.33 to 1.29 . This will lower the ETH collateral ratio from 145% to 140%.
- Increase the WBTC exchange rate haircut from 0.72 to 0.78 and decrease the WBTC exchange rate buffer from 1.38 to 1.29 . This will lower the WBTC collateral ratio from 150% to 140%.
- Decrease the ETH exchange rate liquidation discount from 8% to 6% making it less penalizing for liquidated accounts with ETH collateral.
- Decrease the WBTC exchange rate liquidation discount from 10% to 7% making it less penalizing for liquidated accounts with WBTC collateral.
- Increase the nETH and nWBTC PV haircut percentages from 0.88 to 0.90 (lowering the haircuts from 12% to 10%).
- Increase the nUSDC and nDAI PV haircut percentages from 0.80 to 0.85 (lowering the haircuts from 20% to 15%). This will make it such that nTokens will account for more collateral during the free collateral calculation.
- Increase the nETH and nWBTC liquidation haircut percentages from 0.94 to 0.98 (decreasing the discounts from 6% to 2%). This will make it less penalizing for liquidated accounts when their nTokens are liquidated.
- Increase the nUSDC and nDAI liquidation haircut percentages from 0.94 to 0.97 (decreasing the discounts from 6% to 3%). We propose to set the nUSDC and nDAI discounts at a higher rate than the nETH and nWBTC ones as they are more likely to be the main source of a liquidator’s profit during local currency liquidations.
- Increase the cash withholding buffers from 10% to 13% for nUSDC and nDAI to match it to their leverage thresholds interest rates.
The new liquidation discount parameters for ETH and WBTC will make smaller accounts slightly less profitable to liquidate due to fixed liquidation costs (ex: gas fees). As an example, the new liquidation discount parameter for ETH (6% instead of 8%) will increase the breakeven collateral size for a profitable ETH/USDC liquidation from 11.7K to 15.8K (assuming 120 GWEI gas prices, 40% liquidation portion and $2,500 ETH):
At 200 GWEI and $5,000 ETH the breakeven ETH collateral size for a profitable liquidation would be $52K.
- Notional v2 governance parameters
- Understanding settlements & liquidations
- Technical deep dive on liquidations