Summary
A set of recommendations for enabling both Reserve Factors and E-mode on Seamless.
Reserve Factor Recommendation
Reserve Factor is the share of revenue a protocol receives for facilitating lending and borrowing. These values depend on an asset’s maturity, the maturity of its interest rates, competition, volatility, and the relative importance of the asset to the protocol, among other factors.
For assets like USDC, rates are very competitive, the asset is mature, and volatility is low, hence it carries a Reserve Factor of 10%. If this was higher, USDC’s supply APY would be less attractive, thus attracting less supply, increasing borrow APR, decreasing the amount borrowed, and so forth.
The protocol can set the Reserve Factor higher when an asset is volatile or new, as rates for said asset are less competitive and more likely to fluctuate. These assets are generally set at a 20-35% Reserve Factor. The reserve factor can also discourage the use of a certain market, as may be prudent in the USDbC market in light of native USDC being available.
Finally, Reserve Factor can be an important calculation in looping strategies, especially when users are looping an asset against itself, as is the case on Seamless.
Increasing the Reserve Factor would increase costs for loopers and generate revenue for the protocol, especially while token rewards boosting APY are ongoing. However, this also has the potential to induce liquidations over time as it widens the spread between supply and borrow rates, causing debt to increase faster than collateral. Given on-chain liquidity and user distribution, it is likely that even the largest position would be able to be liquidated efficiently.
Below we recommend two sets of parameters, conservative and aggressive, which will allow us to observe user behavior and potentially adjust them further in the future. It may be preferable to first implement the conservative tranche before implementing the aggressive tranche.
| Asset |
Conservative Reserve Factor |
Aggressive Reserve Factor |
| USDC |
5% |
10% |
| USDbC |
15% |
20% |
| ETH |
10% |
15% |
| cbETH |
10% |
15% |
| DAI |
10% |
15% |
| wstETH |
10% |
15% |
E-mode Enablement Recommendation
E-mode allows Seamless to increase capital efficiency on related assets.
There are two key properties we must require for E-mode assets:
- Pairwise prices must be historically mean reverting — the sampled mean exchange rate of any two tokens is stable and predictable. If the exchange between two assets doesn’t mean-revert, users will experience liquidations, and bad debt might be accrued.
- Pairwise prices must mean-revert quickly — from the moment prices diverge, they must converge back to the mean in a reasonable amount of time. This way, Seamless has some confidence it will not be holding debt for long.
Major price deviations between E-mode assets may lead to bad debt, either from missed or adverse liquidations. We set our LT/LTV values sufficiently low to mitigate bad debt and improve the user experience for retail users.
LT: As a conservative measure, we set LT/LTV ratios according to the most significant deviation observed for any two assets.
LTV: We can minimize the chances that users are liquidated by increasing the gap between LT and LTV. This way, even during major depeg events, they will not be harmed by liquidations (and we further minimize the chances of accruing bad debt).
ETH-correlated
| LTV |
90.00% |
| LT |
93.00% |
| Liquidation Penalty |
2.00% |
Stablecoin (USDC and DAI only)
| LTV |
93.00% |
| LT |
95.00% |
| Liquidation Penalty |
1.00% |
