[NIP-29] Onboard LINK as a Collateral Asset on Notional V3

Title: [NIP-29] Onboard LINK as a Collateral Asset on Notional V3
Author(s): Anthias.xyz Team
Submission Date: 30 October 2023

Summary

The following is a proposal to onboard LINK as a collateral currency option on Notional V3. The Anthias team thinks LINK would prove valuable for the Notional community as a collateral asset and thus would like the community to consider & discuss onboarding it as a collateral type.

Resources

Minimum requirements for consideration checklist

Application

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

  • According to Chainlink’s developer docs, “LINK tokens are used to pay node operators for retrieving data for smart contracts and also for deposits placed by node operators as required by contract creators.” Chainlink node operators are required to stake their LINK tokens.

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

  • LINK is currently used for staking by Chainlink node operators. It is also a collateral asset on multiple lending platforms including Compound V3 and Aave V3.

3. 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.

  • Chainlink is the most well-known oracle platform, and its native token LINK is an asset that meets the criteria outlined in the Collateral Asset Onboarding framework for Notional V3. LINK is also a collateral asset on multiple other lending platforms, and Notional V3’s launch on Arbitrum could prove to be a prime opportunity to capitalize on LINK lending liquidity on Arbitrum.

4. Provide information regarding the organization behind the project.

  • Chainlink’s team is global and public. According to Chainlink documentation, over 1,700 Web3 projects have integrated Chainlink services. Chainlink is known for security and resilience.

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

  • Chainlink has occasionally come under scrutiny for oracle manipulations that have led to or resulted in protocol exploits. This does not necessarily affect the LINK token directly, but it is something for the Notional community to consider.

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

  1. Market Cap: $6,258,027,243

  2. 24H Volume: $1,418,088,244

  3. LINK DEX Liquidity (DEX Guru):

  • LINK has over $21M of DEX liquidity at the time of posting this proposal according to DEX Guru: DexGuru

4. LINK DEX Slippage

  • LINK slippage for a 1M USDC swap is currently about 2.43%.

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

  • According to Defillama Unlocks, there are about 100M LINK left to be unlocked. These tokens will be granted to the company behind Chainlink. The tokens are vesting and released linearly until October of 2028.

Conclusion

The Anthias team would like to gauge sentiment and hear thoughts from the Notional community with regards to onboarding LINK 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.

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, GMX, ARB, RDNT, and UNI on Notional V3.

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Date of analysis: 2023-11-03

Summary

Following up on @Anthias.xyz’s proposal, we assessed the risk implications of listing a Prime LINK market on Notional’s Arbitrum deployment. If the DAO is in favor of listing LINK then we suggest listing the asset with an initial supply cap of $500K (~45,000 LINK), 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: LINK
  • Underlying Protocol Name: Chainlink
  • Historical daily volume (avg. last 30 days): $240M (CEX and DEX)
  • DEX liquidity (Arb): $3.1M
  • Market cap: $6.1B
  • Total supply: 1,000,000,000 LINK Tokens

Economic Risk Assessment

Asset ownership & DeFi presence

LINK is currently held by 299,400 wallets on Arbitrum. The top 100 wallets own 81.1% of the supply. 34% of the token supply is held on Aave V3, 21% on GMX and 4% on Uniswap V3.

Underlying protocol KPIs

Chainlink is the most widely used oracle network in the cryptocurrency space. Chainlink provides more than 1000 oracles over 15 networks.

Token

LINK is used to pay node operators for retrieving data for smart contracts and also for deposits placed by node operators as required by contract creators. LINK token stats can be tracked here.

Historical volatility

LINK historical price vs ETH

Historical volatility analysis

LINK

Time period Volatility (last 90 days) Annualized vol. (last 90 days) Volatility (last year) Annualized vol. (last year) Source
1h 0.69% 64.95% 0.71% 66.49% Chainlink
1d 3.98% 76.08% 3.88% 74.07% 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

LINK

Time period Max drawdown (last 90 days) Max drawdown (last year) Max drawup (last 90 days) Max drawup (last year)
1 hour -7.50% -7.50% 6.28% 6.28%
1 day -11.64% -19.57% 20.90% 20.90%

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%

LINK 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. LINK is also subject to smart contract risks.

Therefore, we propose a 140% minimum LINK/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

LINK to USDC slippage analysis:

Expected slippage Trade size
0.5% $500,000
1.0% $675,000
2.0% $800,000
3.0% $895,000
4.0% $900,000

LINK is listed on both GMX and Uniswap V3 and benefits from a decent amount of liquidity on Arbitrum with less than approximately 2% slippage for a $800K trade.

On-chain liquidity breakdown (on Arbitrum):

DEX LINK liquidity (Arb) Non LINK liquidity (Arb)
Uniswap V3 $1,060,000 $1,294,000
GMX $1,800,000 $1,800,000
Total $2,860,000 $3,094,000

We propose setting the initial LINK supply cap at $500K. We think setting it at $500K is conservative given LINK’s liquidity profile on Arbitrum. Setting a lower initial supply cap will allow the DAO to gauge demand from LINK suppliers. If there is high demand for LINK on Notional the DAO could increase the supply cap.

Other notable risks

LINK 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 LINK.

Security Assessment

As mentioned by @anthias in the initial post, the Chainlink protocol underwent multiple security audits and has been active for a long time.

Implementation Review

No specific integration challenges have been identified.

Proposed Risk Parameters

Based on the different analyses presented above, we propose listing LINK with the parameters presented in this spreadsheet. Based on LINK’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 LINK profitably under historical market conditions. Finally, we propose to list the asset with an initial supply cap of $500K (45,000 LINK).

We propose the following listing Prime LINK 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 (Arbitrum) Compound V3 (Mainnet) Notional (Arbitrum)
Liquidation Discount 10% 7% 8%
Minimum Collateral Ratio (vs USDC) 129% 127% 140%
Supply Cap (USD) $9,800,000 N/A $500,000

The proposed minimum collateral ratio is more conservative than what Compound and Aave offer. The proposed liquidation discount is in line with the discount used by Compound and Aave.

Resources

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