Adjusting Parameters: Increasing Borrow Caps of Existing Markets

[richyRNG]

Background:
Seamless has grown to be a top TVL and user project on Base. The supply of liquid assets on the platform, such as major assets like ETH and USDbC, has grown significantly in this time to account for nearly 25% of total TVL on Base chain.

With this growth, the borrowing on the platform has long been at maximum capacity and unable to grow more due to the genesis borrow caps.

Though these borrow caps serve their purpose (conservative approach for safe liquidations, overall safety of the platform), Seamless appears to be ready for its next phase of growth and for an adjustment of the borrow caps.

Proposal:
With several months of operating history, the addition of Chaos Labs to the community (+ their risk monitoring expertise) and the growing robustness of the liquidator network, it makes sense to re-evaluate and increase the borrow caps across all existing Seamless markets.

Additionally, it is prudent to begin raising the borrow caps to enable more capital efficiency of the platform, and for the newly deposited liquidity to “do work” (generate fees) for the Protocol and enable more growth for the wider Base ecosystem.

The current proposal would be to increase borrow caps (albeit not excessively) across all markets, specifically:

• USDbC - raise from 400k USDbC to 3.8m USDbC
• ETH - raise from 254 ETH (~556k USD) to 1,300 ETH (2.85m USD)
• Native USDC - raise from 150k USDC to 1.8m (pending supply cap adjustment as well)
• DAI - raise from 50k DAI to 1.8m (pending supply cap adjustment as well)
• cbETH - analysis in progress

Initial analysis on borrow cap limit increases has been done by Chaos Labs across these fronts.

Next Steps:
Open discussion period for the community to share its thoughts or suggestions. If there is enough rich discussion and/or alignment, a snapshot vote will be held to kick-start the onchain governance process.

[lewis]

Have heard this from so many members in Discord so it is clearly a shared sentiment from users of the Protocol. I feel that adhering to the limits in accordance with Chaos Labs makes the most sense – good to have a marker as opposed to ‘raise borrow caps’ without any clear numbers.

Beyond this as new markets come online perhaps through the Seamless Spark Program: A new program -- Spark, having Chaos Labs weight in on borrow limits will also be productive.

[battlesend]

Hey Community,
Maintaining the caps on the protocol at current levels is an inefficient use of capital and is impeding any growth of the protocol. Looking at the markets, the borrowing caps are pretty restrictive with the market currently having a borrow usage of 1.7%.

Furthermore, these caps are restricting new suppliers and borrowers from taking advantage of the Seam token rewards. Basically the high APY earnings are only being given to a select few and is not generating a further growth for the protocol. The protocol is basically wasting all those Seam tokens with their cap restriction.

All these assets are bluechip and have substantial liquidity across multiple chains. Here are some slippage numbers via 1inch that should inform the community to push cap increases as soon as possible:

DAI Slippage

3.11% slippage for 1.5M with a liquidation penalty of 5%.

USDC Slippage

3.59% slippage for 1.5M with a liquidation penalty of 5%

ETH Slippage

Here are recommendations for the community to consider to get this protocol active and earning reserves:

Recommendation

DAI Supply Cap: 100K to 1.5M
DAI Borrow Cap: 50k to 1.35M

USDC Supply Cap: 200K to 1.5M
USDC Borrow Cap: 150k to 1.35M

WETH Borrow Cap: 254 to 1k

USDbC Borrow Cap: 150k to 1.35M

cbETH Borrow Cap: 121 to 500

[Uhtred_son_of_Uhtred]

I am for increasing the borrow caps

[Ras]

Thank you @richyRNG for presenting this proposal. The Seamless community has been long advocating for increasing borrow caps.

While I support a gradual increase and proper risk analysis, I would push for increasing cbETH borrow cap as well for at least 100 additional cbETH (totalling 221 cbETH). I hope that, after Chaos Labs presents its analysis, the DAO will be able to increase it more

[daryl]

This is a great proposal, as people have said, many community members have been asking for these caps to be raised. I would tend to support the parameters in @richyRNG’s original post, as they are generally larger than those mentioned by @battlesend (I’m all for higher caps). Both analyses look good to me though.

I’d say we try to move this through the governance process soon, given people have been asking for these changes in Discord/Telegram, so I assume there’s a lot of support. Thanks again for making this proposal.

[ForkingBlocks]

I am in support of this proposal as is and would advocate for quickly moving it forward to the next step in the governance process. Raising the borrow caps is at the perfect crossroads at the moment. The combination of both safety and interest are perfectly aligned and an increase in the borrow caps appears to be both safe and desired.

It is clear that there is high if not extreme interest from the Seamless community as you can observe from various Seamless social channels, Discord server and governance discussions in Discord where deliberate conversations and soft gauges of interest were collected. Outside of the direct Seamless community it is clear that the overall Base and DeFi ecosystems have very high demand as well. This can be observed when looking at the assets on the Seamless platform and the demand to supply and to borrow them. At 100% utility on the borrow side the demand is obvious. As an indicator of both supply and borrow demand Seamless has secured its position among the top 2 largest in TVL of all projects on Base. These factors in combination indicate that the desire to raise caps is there.

When considering the overall demand for cap increases alongside safety and practicality, the rationale for an immediate adjustment becomes even clearer. The genesis caps, while suitable for bootstrapping, now benefit from the expert evaluation of Chaos Labs, a prominent risk analysis group. Their involvement adds a layer of professionalism and experience, paving the way for the intelligent and responsible growth of Seamless. The proposed borrow cap increases align with what appears to be meaningful but thoughtfully proposed limits, reinforcing the notion of secure and responsible expansion.

Because all the elements are in place in terms of responsible growth, market demand and softly signaled demand from SEAM holders I recommend we promptly move this proposal forward to the next stage of the governance process.

[Kassad666]

Absolutely completely yes!

[richyRNG]

To clarify - a few points have been brought up in the community via tg/discord channels.

Supply caps would be similarly increased for a few assets, most notable DAI and Native USDC. The supply caps would increase to match the borrowing caps, and would be 2m for both native USDC and Dai

Taking other comments into consideration we could consider lower supply caps and borrow caps for these two markets as well

[Ras]

Thanks for clarifying! Maybe for the sake of visibility you could add these clarifications and repost an updated version of the proposal as a new message here?

[chaoslabs]

Chaos Labs Risk Parameter Updates - 12/20/23

Overview

Chaos Labs recommends updating supply and borrow caps across Seamless assets:

Asset	Current Supply Cap	Recommended Supply Cap	Current Borrow Cap	Recommended Borrow Cap
USDbC	N/A	6,000,000*	400,000	5,400,000
USDC	200,000	2,700,000	150,000	2,500,000
DAI	100,000	1,000,000	50,000	900,000
WETH	N/A	2,500**	254	2,000
cbETH	800	1,600	121	800

(*) Given the current supply on Seamless, this would lead to effectively pausing additional supply. Should the community decide to opt for the continued growth of the pool, we recommend setting the supply cap at 50% of the total circulating supply which is currently 66m WETH.

(**) Given the current supply on Seamless, this would lead to effectively pausing additional supply. Should the community decide to opt for the continued growth of the pool, we recommend setting the supply cap at 50% of the total circulating supply which is currently 27.5k WETH.

Analysis

The recommendations below were made utilizing Chaos’ supply and borrow cap methodologies and after analyzing user positions for each asset. For the coming recommendation, we utilize our framework for initial supply and borrow caps for new assets and deployments and propose setting initial supply caps at 2x the liquidity available under the Liquidation Penalty price impact.

USDC

Overview

The supply cap and borrow cap for USDC on Seamless are currently at 100% utilization.

Given the concentrated liquidity of USDbC as shown in the liquidity analysis below, we recommend setting the supply cap at 2,700,000 USDC, and the borrow cap at 2,450,000 USDC.

Positions Analysis

Currently, ~66% of the borrows of USDC are borrowed against USDbC to farm incentive rewards. While the incentive program has driven increased usage, it’s worth noting that a substantial portion of this activity involves users looping the same asset to capture yield.

Notably, a single user is supplying 66% of USDC supply cap and borrows 56% of USDC borrow cap:

Liquidity

The current on-chain liquidity for USDC on Base against ETH is ~1.35M USDC under the liquidation bonus price impact.

Circulating Supply

The current circulating supply sits at ~177M USDC.

USDbC

Overview

The borrow cap for USDbC on Seamless is currently at 100% utilization.

Given the concentrated liquidity of USDbC as shown in the liquidity analysis below, we recommend setting the supply cap at 6,000,000 USDbC, and the borrow cap at 5,600,000 USDbC.

Given the current supply on Seamless, this would lead to effectively pausing additional supply. Should the community decide to opt for the continued growth of the pool, our recommendation is to cap at 50% of the total circulating supply which is currently 66M USDbC.

Positions Analysis

Currently, ~54% of the borrows of USDbC are borrowed against USDbC to farm incentive rewards. While the incentive program has driven increased usage, it’s worth noting that a substantial portion of this activity involves users looping the same asset to capture yield.

Three major users borrow USDbC on Seamless, accounting for more than 67% of total borrows. These accounts are borrowing USDbC against USDbC:

1. 0x8442e9e265563ddc642b4f4f69d8acccad5a0e6b - borrowing ~169K USDbC backed by ~169K USDbC, ~138K WETH and ~310K cbETH collateral, accounting for 42% of the borrow cap. The user’s current health score is 1.19.
2. 0x2ececf5a33d038694133bbf3a22aeafbc96d4b04 - borrowing ~52K USDbC backed by ~189K USDbC, ~51K WETH and ~83K cbETH collateral, accounting for ~13% of the borrow cap. The user’s current health score is 2.44.
3. 0xc943567973fc93d78b19140f83524cdd7366f299 - borrowing 50K USDbC backed by ~113K USDbC collateral, accounting for ~12.5%% of the borrow cap. The user’s current health score is 1.79.

Liquidity

The current on-chain liquidity for USDbC on Base against WETH is ~3M USDbC under the liquidation bonus price impact.

Circulating Supply

The current circulating supply sits at ~112M USDC.

Our supply cap methodology recommends limiting the supply cap of an asset to 50% of the on-chain circulating supply, which is 61M USDbC

DAI

Overview

The supply cap and borrow cap for DAI on Seamless are currently at 100% utilization.

Given the concentrated liquidity of DAI as shown in the liquidity analysis below, we recommend setting the supply cap at 1,000,000 DAI, and the borrow cap at 900,000 DAI.

Positions Analysis

Liquidity

The current on-chain liquidity for DAI on Base against USDbC is ~500K DAI under the liquidation bonus price impact.

Circulating Supply

The current Circulating Supply sits at ~9.4M DAI.

WETH

Overview

The borrow cap for WETH on Seamless is currently at 100% utilization.

Given the concentrated liquidity of WETH as shown in the liquidity analysis below, our methodology suggests setting the supply cap at 2,500 WETH, and the borrow cap at 2,000 WETH.

Given the current supply on Seamless, this would lead to effectively pausing additional supply. Should the community decide to opt for the continued growth of the pool, our recommendation is to cap at 50% of the total circulating supply which is currently 27.5K WETH.

Positions Analysis

Currently, ~58% of the borrows of WETH are borrowed against WETH to farm incentive rewards. While the incentive program has driven increased usage, it’s worth noting that a substantial portion of this activity involves users looping the same asset to capture yield.

Liquidity

The current on-chain liquidity for WETH on Base against USDbC is ~1,250 WETH under the liquidation bonus price impact.

Circulating Supply

The current Circulating Supply sits at ~55K WETH.

Our supply cap methodology recommends limiting the supply cap of an asset to 50% of the on-chain circulating supply, which is 27.5K WETH

cbETH

Overview

The supply cap and borrow cap for cbETH on Seamless are currently at 100% utilization.

Utilizing our supply and borrow cap methodology and considering the current usage on Seamless and liquidity conditions, we recommend setting the supply cap to 1,600 cbETH, and increasing the borrow cap to 900 cbETH.

Analysis

Positions Analysis

Currently, ~56% of the borrows of cbETH are borrowed against cbETH to farm incentive rewards. While the incentive program has driven increased usage, it’s worth noting that a substantial portion of this activity involves users looping the same asset to capture yield.

Liquidity

The current on-chain liquidity for cbETH on Base against WETH is ~550 cbETH under the liquidation bonus price impact.

Circulating Supply

The current Circulating Supply sits at ~19K cbETH.

Our supply cap methodology recommends limiting the supply cap of an asset to 50% of the on-chain circulating supply, which is ~9.5K cbETH

[Smailov]

Great work!
The proposed adjustments make sense in line with the platform’s growth <3
Looking forward to seeing these changes positively impact our community.

[Dominic]

Agree with this proposal and a For from me. It would help increase the efficiency in capital usage for the proposal, based on that it can help to accelerate more TVL coming to it.

[Dominic]

This proposal will definitely have a “For” Vote from me!

[battlesend]

Agree with the higher caps recommended by either Chaos or @richyRNG. My recommendations were super conservative and non-sensical increases. I am happy to hear the community is moving forward with increases and opening the market to more participants.

[wes_fred]

I support this proposal, and moving quickly to put this to a vote on chain given the caps are currently at maximum capacity. There is clear demand for raising the borrow caps. I believe the analysis presented in this thread, especially from @chaoslabs , indicates that the caps are being raised responsibly.

[battlesend]

Is there an ETA on when the caps will be put through governance? It has been 6 days since Chaos recommendation

[lewis]

Appreciate the analysis by @chaoslabs and the recommendation to raise caps across the board. Considering risk, and liquidity across BASE, this seems very reasonable and worth moving towards governance. This adjustment and unlock will galvanize users to start borrowing on Seamless since markets are currently capped – In favor of this

[kitanovic]

Knowing that there is big demand on platform for this and that Chaos gave a green light for increasing them in certain boundaries I entirely support this proposal. I also believe that suppliers are waiting for something like this for a while.

[xnp]

Very nice analysis @chaoslabs, good call on the limiting supply cap at the 50% of asset circulating supply, further securing the protocol. All parameters seem reasonable, and a big “for” vote from me on rasing the borrow caps!