[NIP-24] Onboard ARB as a Collateral Asset on Notional V3

[NIP] Notional Improvement Proposal
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Title: Onboard ARB as a Collateral Asset on Notional V3
Author(s): Anthias.xyz Team
Submission Date: 17 October 2023

Summary

The following is a proposal to onboard ARB as a collateral currency option on Notional V3. The Anthias team thinks this asset, like cbETH and GMX as outlined in previous proposals, could prove valuable for the Notional community and thus would like the community to consider & discuss onboarding ARB as a collateral type.

Resources

Minimum requirements for consideration checklist

  • The asset is an ERC-20 token:
  • The asset has been traded for at least 3 months:
  • A sufficiently robust Chainlink oracle (verified tier) for the asset exists:
  • At least two high-quality audits have been conducted:
  • The token is held by more than 1,000 unique wallets:
  • The current float (circulating supply/max supply) is above 25%:
    • No: Float is currently at 12.75%, but this number will soon increase once ARB from the grants / incentivization program reaches the market.
  • The token has more than $2m of on-chain DEX TVL (Mainnet) or more than $500K of on-chain DEX liquidity on a Layer 2 chain where a Notional deployment exists:
    • Yes: ARB currently has over $26.8M in TVL on Uniswap V3 on Aribitrum: Uniswap Info

Application

1. Provide a brief overview of the proposed asset and its underlying project.

  • The ARB token is the native governance token of the Arbitrum Layer 2 scaling solution. It is used to participate in the Arbitrum DAO, which is responsible for managing the Arbitrum protocol and its future development.

2. How is the asset currently used (staking, collateral on other lending protocols, etc.)? Provide relevant activity KPIs.

  • ARB is currently used for staking on a variety of protocols. It is also a collateral asset on Aave V3 with over $1,490,000 in ARB borrowed and over $5,090,000 in ARB supplied. ARB is also used as a collateral asset on Compound V3.
    1. Detail why you believe the project should be added to Notional either as a collateral asset or as a tradable asset and the potential benefits of doing so. Explain why you think the demand for this asset is sufficient to list it on Notional.*
  • Since its launch, Arbitrum has seen impressive TVL growth and user adoption; currently it boasts the fourth largest TVL of any chain at just over $2B. Because Notional V3 is launching initially, it makes sense to offer ARB, the native governance token on Arbitrum, as a collateral asset, which will inevitably incentivize further protocol adoption. ARB meets the criteria outlined by the Collateral Asset Onboarding framework created by the Notional core team, so we think it would be a great benefit to the Notional community to onboard ARB as a collateral asset.

4. Provide information regarding the organization behind the project.

  • Offchain Labs are the primary builders behind Arbitrum and the ARB token. The team is known for its reputability and is backed by some of the most respected firms in the blockchain space including Pantera, Lightspeed, Polychain Capital, Coinbase Ventures, and more.

5. Provide information regarding past hacks or major bugs and how the team addressed them.

  • In September 2022, Arbitrum compensated a whitehat who found a vulnerability in the bridge between Ethereum and Arbitrum Nitro.
    • No other hacks/exploits of Arbitrum directly were found. If the community knows of others since the L2’s launch, please feel free to provide information.

6. Provide an overview of the token’s market data.

  1. Market Cap: $1,041,757,875

  2. 24H Volume: $143,541,252

  3. ARB Volatility (ARB price compared to ETH over past 12 months):

    • ARB has a volatility of 4.90% over the past 90 days, according to CoinCodex.

  1. ARB DEX Liquidity (DEX Guru):
    GMX has over $13.7M of DEX liquidity at the time of posting this proposal according to DEX Guru: DexGuru

  2. GMX DEX Slippage: ARB slippage for a 1M USDC swap is currently about 3.25%. Liquidity is sufficient to support the asset with a relatively high supply cap over time based on demand.

  3. Provide an overview of the token emission schedule and major holders.

    • This chart by Token Terminal outlines the vesting schedule of ARB tokens over the next four years. The emissions schedule involves tokens being released to the team, advisors, and investors. By March of 2027, the emissions of the token will be complete, and the full 10,000,000,000 ARB will be in circulation. ARB is heavily distributed among a range of holders.

Conclusion

The Anthias team would like to gauge sentiment and hear thoughts from the Notional community with regards to onboarding ARB as a collateral type to Notional V3. Please share thoughts/questions in the comments of this forum post, and feel free to reach out to 0xBroze (@0xBroze on Discord or @OxBroze on Telegram) with any questions.

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About Anthias

Anthias is a risk management organization that also builds tools for easily monitoring liquidation risk for DeFi borrowing/lending markets. The Anthias team has shipped multiple grants for Euler, Aave, Compound, and more. We also recently posted the collateral asset onboarding proposals for cbETH and GMX on Notional V3.

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Date of analysis: 2023-10-18

Summary

Following up on the @Anthias.xyz proposal, we assessed the risk implications of listing a Prime ARB market on Notional’s Arbitrum deployment. If the DAO is in favor of listing ARB then we suggest listing the asset with an initial supply cap of $1M (~1,200,000 ARB), a liquidation discount of 8%, and an implied minimum collateral ratio of 160% vs stablecoins. Our asset onboarding review highlighted no significant technical issues to list the asset. We welcome community feedback before this proposal is formalized into a Notional Improvement Proposal (NIP) and goes to a formal governance vote.

Asset Overview

  • Asset symbol: ARB
  • Underlying Protocol Name: Arbitrum
  • Historical daily volume (avg. last 30 days): $115M (CEX and DEX)
  • DEX liquidity: $28M
  • Market cap: $1.05B
  • FDV: $8.2B
  • Total supply: 10B tokens

Economic Risk Assessment

Asset ownership & DeFi presence

ARB is currently held by 702K addresses on Arbitrum. The top 100 wallets own 84% of the supply. 35% of the token supply is held in the DAO treasury contract, 6.3% is held in the vesting contract and 5% is held in a multisig for offchain labs investors. Let’s note that the current circulating supply is about 13% of the total ARB supply. As investors unlock their ARB and as the treasury disburses funds the circulating supply will increase which could materially change ARB’s liquidity profile.

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Arb is listed as a collateral asset on Compound V3 and Aave V3 Arbitrum deployments. 6.3M ($5M) and 3.6M ($3M) ARB tokens are currently deposited on these protocols respectively.

Underlying protocol KPIs

Arbitrum is a layer 2 EVM compatible chain. It is currently the 4th chain by TVL with $1.7B in TVL. 101,000 wallets interacted with the Arbitrum chain in the last 24 hours according to DeFi Llama.

Token

ARB is the governance token of the Arbitrum chain. ARB token holders can vote on DAO votes or delegate their tokens to other DAO participants.

Historical volatility

ARB historical price vs ETH

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Historical volatility analysis

ARB

Time period Volatility (last 90 days) Annualized Volatility (last year) Annualized vol. (last year) Source
1h 0.65% 60.84% 0.70% 65.29% Chainlink
1d 3.02% 57.66% 4.35% 83.09% Chainlink

ETH

Time period Volatility (last 90 days) Annualized Volatility (last year) Annualized vol. (last year) Source
1h 0.37% 34.53% 0.43% 40.47% Chainlink
1d 1.72% 32.87% 2.07% 39.57% Chainlink

Historical maximum drawdown analysis

ARB

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -7.24% -7.24% 4.51% 5.52%
1 day -11.83% -12.16% 9.12% 23.69%

ETH

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -5.38% -5.72% 4.96% 4.96%
1 day -10.44% -10.44% 7.07% 7.07%

ARB has historically been more volatile than ETH. It also had more pronounced drawdowns than ETH’s over the last 90 days making the asset more risky. ARB is also subject to smart contract and governance risks.

Therefore, we propose a 160% minimum ARB/USDC collateral ratio. This would protect the protocol against the worst historical maximum drawdown over a 1 day period. This implies that the protocol would have still been overcollateralized if risky accounts were not being liquidated for a period of 24 hours.

Asset liquidity

ARB to USDC slippage analysis:

Expected slippage Trade size
0.5% $260K
1.0% $475K
2.0% $550K
3.0% $725K
4.0% $750K
5.0% $760K
6.0% $770K

ARB is listed on multiple DEXes and benefits from deep liquidity with less approximately 2% slippage for a $500K trade. Slippage increases rapidly for trades larger than $700K.

On-chain liquidity breakdown (on Arbitrum):

DEX ARB liquidity Non ARB liquidity
Balancer $20.9M $3.1M
Uniswap V3 $1.4M $2.8M
Total $22.3M $5.9M

We propose setting the ARB supply cap at $1M based on the asset’s on-chain liquidity profile. If demand for ARB is elevated the DAO could increase the supply cap at a later date.

Other notable risks

ARB is subject to rapid changes in liquidity due to its relatively low circulating supply compared to its total supply. Future unlocks could materially change ARB’s liquidity profile. Moreover, ARB is subject to potential technological risks related to the Arbitrum chain. These idiosyncratic risks can be somewhat mitigated by a lower exchange rate haircut (higher minimum collateral ratio).

Security Assessment

As mentioned by @anthias in the initial post, Arbitrum underwent multiple security audits from auditors like ConsenSys Dilligenge and Trail of Bits.

Implementation Review

No specific integration challenges have been identified.

Proposed Risk Parameters

Based on the different analyses presented above, we propose listing ARB with the parameters presented in this spreadsheet. Based on ARB’s historical volatility profile, we propose to list the asset with exchange rate haircut and buffer parameters that imply a minimum collateral ratio of 160% for USDC borrowers. Based on current on-chain liquidity we propose to list the asset with a 8% liquidation discount. We think a 8% discount is sufficient to allow liquidators to liquidate ARB profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $1M (1,200,000 ARB).

We propose the following listing Prime ARB interest rate curve. The proposed interest rate models imply a 2.26% borrow interest rate and 1.23% supply interest rate at the target utilization rate.

Risk Parameters Benchmarking

Parameter Aave V3 Compound V3 Notional
Liquidation Discount 10% 7% 8%
Minimum Collateral Ratio (vs USDC) 167% 167% 160%
Supply Cap (USD) 16,000,000 6,500,000 1,000,000

The proposed liquidation discount is in line with the discount used by Compound and Aave. We propose a more aggressive minimum collateral ratio than Compound and Aave but with a substantially lower supply cap.

Resources

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