This proposal aims to increase the cap for the axlUSDC/OSMO vault on Mars Farm from 750,000 axlUSDC to 2,000,000 axlUSDC.
This increase will raise the max provision of liquidity of the axlUSDC/OSMO pool through MARS to around 25% (2,000,000 / (9,000,000 - 750,000))
The axlUSDC/OSMO vault has filled up to 100% for some time now, which suggests there’s considerable additional demand to use this vault. With this cap increase, we aim to fulfil this currently unmet demand and increase organic usage of the Red Bank.
Both MRC-30 and MRC-41 set the caps to ~30% and ~20% respectively.
This prop provides the possibility to increase utilization of the both underutilized lending pools of axlUSDC and OSMO.
The Farm vault caps serve one main purpose: They limit the exposure to any single token. This is important to mitigate idiosyncratic risks specific to any single token and to mitigate liquidity risk, which may impede proper functioning of the liquidations system and may ultimately lead to bad debt.
Obviously, as the cap increases, so do the risks explored above. At the end of the day, the right level for the caps should strike an appropriate balance between risk aversion and protocol usefulness. In this sense, we think while the proposed cap increase does increase risk for the protocol, it’s far from representing an unmanageable risk, while at the same time will help fulfill currently unmet demand for the protocol.
I am totaly in favor of increasing the cap. Its was maxed for a loooong time so far.
I am in favor of this proposal.
Hey @0xphilipp, thanks for the proposal! A couple comments:
- I think the deposit cap should consider both the caps in the Red Bank and Farm, since that’s the global exposure the protocol as a whole has to a particular token. Currently, for axlUSDC, the cap on the Red Bank is $3M and the axlUSDC/OSMO cap on Farm is $750k. Since on Farm the exposure to axlUSDC ends up being half of the cap (at 100% utilization), the current exposure (or global cap) to axlUSDC is $3.375M.
- Regarding MRC-30 and MRC-31, the relation of the cap as a percentage of onchain liquidity was calculated using the liquidity of the token by itself. In other words, for axlUSDC the liquidity used would be the one displayed here: $4.8M currently.
What the above means is that the current axlUSDC cap as a percentage of onchain liquidity is ~70% (3.375 / 4.8), which is high relative to all other caps on the protocol. This was corroborated in the 1st run of the deposit caps methodology, which already suggested a lower cap for axlUSDC, as reported here.
Having said that, I understand there’s currently unmet demand for using both axlUSDC and axlUSDC/OSMO on the Red Bank and Farm, respectively. To this end, we’ve been working on a new deposit caps methodology that would take into account not just onchain but also offchain liquidity to determine the deposit caps. We expect this methodology to allow assets such as axlUSDC, which have low onchain liquidity but significant offchain liquidity, to have higher caps than those that would be enabled by relying on onchain liquidity only.
We expect to propose this new methodology to the community within the next few weeks. As such, I suggest we delay this vote until after the methodology and suggested new caps are out, so that we have a more robust framework to help us make this decision.
Thank you Jon. I am on the same page. I hear the need for higher caps for axlUSDC especially as there is organic demand for it. But I also see risks involved in increasing it irresponsibility. I think since the new caps methodology is close to being released, that it wouldn’t hurt waiting a bit more and see what the new caps would be under the new methodology.
Rereading your statement, this just makes me believe that the deposit cap for USDC is too high in the Red Bank.
There is no demand to borrow 3 M USDC, so to keep the same exposure, reduce the deposit cap of USDC to 2.375 M $ in Red Bank, then the total exposure stays the same, when increasing the farm to 2 M $ where we see concrete demand.
This would leave enough room (~1 M USDC) to be borrowed through the Red Bank, but still allow the farm to utilize the underutilized USDC / OSMO pools better and keep the currently existing exposure. So win-win-win.