Date of analysis: 2023-11-03
Summary
Following up on the @Anthias.xyz proposal, we assessed the risk implications of listing a Prime UNI market on Notional’s Arbitrum deployment. If the DAO is in favor of listing UNI then we suggest listing the asset with an initial supply cap of $500K (~120,000 UNI), a liquidation discount of 8%, and an implied minimum collateral ratio of 140% 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: UNI
- Underlying Protocol Name: Uniswap protocol
- Historical daily volume (avg. last 30 days): $161M (CEX and DEX)
- DEX liquidity (Arbitrum): $4M
- Market cap: $4.8B
- Total supply: 1,000,000,000 UNI Tokens
Economic Risk Assessment
Asset ownership & DeFi presence
UNI is currently held by 26,359 wallets on Arbitrum. The top 100 wallets own 88.96% of the supply. 61% of the token supply on Arbitrum is in GMX. 11% of the UNI supply is currently in the ETH/UNI uniswap pool.
Underlying protocol KPIs
The Uniswap protocol facilitates in excess of $500M in trading volume from more than 60K addresses daily across all its deployments. The protocol’s TVL currently is $3.32B. Uniswap is the most popular DEX on Ethereum and has been live since 2018.
Token
UNI is the utility and governance token of the Uniswap protocol. UNI token holders can vote on governance proposals and could eventually receive protocol fees if the fee switch is activated.
Historical volatility
UNI historical price vs ETH
Historical volatility analysis
UNI
| Time period | Volatility (last 90 days) | Annualized vol (last 90 days) | Volatility (last year) | Annualized vol. (last year) | Source |
|---|---|---|---|---|---|
| 1h | 0.64% | 59.59% | 0.68% | 63.30% | Chainlink |
| 1d | 2.99% | 57.12% | 3.75% | 71.65% | Chainlink |
ETH
| Time period | Volatility (last 90 days) | Annualized vol (last 90 days) | Volatility (last year) | Annualized vol. (last year) | Source |
|---|---|---|---|---|---|
| 1h | 0.37% | 34.53% | 0.56% | 52.18% | Chainlink |
| 1d | 1.72% | 32.87% | 2.92% | 55.80% | Chainlink |
Historical maximum drawdown analysis
UNI
| Time period | Max drawdown (last 90 days) | Max drawdown (last year) | Max drawup (last 90 days) | Max drawup (last year) |
|---|---|---|---|---|
| 1 hour | -7.03% | -7.03% | 5.42% | 5.42% |
| 1 day | -11.85% | -20.05% | 11.54% | 17.97% |
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% | -7.20% | 4.96% | 7.36% |
| 1 day | -10.44% | -24.99% | 7.07% | 17.86% |
UNI 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.
Therefore, we propose a 140% minimum UNI/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
UNI to USDC slippage analysis:
| Expected slippage | Trade size |
|---|---|
| 0.5% | $750,000 |
| 1.0% | $765,000 |
| 2.0% | $770,000 |
| 3.0% | $780,000 |
| 4.0% | $785,000 |
| 5.0% | $810,000 |
UNI (arb) is listed on Uniswap V3 and GMX and benefits from relatively good liquidity with approximately 2% slippage for a $770K trade.
On-chain liquidity breakdown (on Arbitrum):
| DEX | UNI liquidity (Arb) | Non UNI liquidity (Arb) |
|---|---|---|
| Uniswap V3 | $528,000 | $16,000 |
| GMX | $2,485,000 | $975,000 |
| Total | $3,013,000 | $991,000 |
We propose setting the UNI supply cap at $500K in order to gauge demand from UNI suppliers. If there is high demand for UNI on Notional the DAO could increase the supply cap at a later date if UNI’s liquidity profile on Arbitrum supports such a decision. Given that most of the UNI liquidity is on GMX, monitoring how liquidity evolves on GMX is going to be important.
Other notable risks
UNI is also subject to smart contract risks. A potential vulnerability in the protocol’s contracts could lead to a rapid price decline in the value of UNI.
Security Assessment
As mentioned by @anthias in the initial post, the Uniswap protocol underwent multiple security audits from top auditors.
Implementation Review
No specific integration challenges have been identified.
Proposed Risk Parameters
Based on the different analyses presented above, we propose listing UNI with the parameters presented in this spreadsheet. Based on UNI’s historical volatility profile, we propose to list the asset with exchange rate haircut and buffer parameters that imply a minimum collateral ratio of 140% 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 GMX profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $500K (120,000 UNI).
We propose the following listing Prime UNI 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 (Mainnet) | Compound V3 (Mainnet) | Notional V3 (Arbitrum) |
|---|---|---|---|
| Liquidation Discount | 10% | 7% | 8% |
| Minimum Collateral Ratio (vs USDC) | 130% | 133% | 140% |
| Supply Cap (USD) | N/A | N/A | $500,000 |
The proposed liquidation discount is in line with the discount used by Compound and Aave on Mainnet. The proposed minimum collateral ratio is more conservative than what Compound and Aave offer on Mainnet.