PCP-2 - Market Parameter Adjustments and Introduction of Custom wstETH (In Preparation for ILMs)

[wes_fred]

TL;DR - Following analysis and community/expert feedback, adjustments to supply and borrow caps for crucial markets are proposed below, to align with current market conditions. Additionally, a custom market is proposed to be introduced for wstETH in order to set the stage for the ILM launch sequence (which may be coming within the next few weeks).

Background/Context:

Seamless has continued solidifying its position as the #2 largest DApp on Base, recently surpassing 24k users. With consistent growth in transactions and users, adjustments to key market parameters are essential to ensure the platform’s continued success. Additionally, with the pursuit of delivering on the Seamless vision of capital efficiency, core contributors suggest introducing a custom market to help support ILM launch.

Adjusting Market Parameters

Demand for borrowing remains robust across key markets like USDbC, ETH, and cbETH. Borrowing caps are proposed to be adjusted based on community feedback, including insights from experts such as Chaos Labs, and considering broader market liquidity conditions. Continuing the iterative process initiated by SIP-1 (link: Adjusting Parameters: Increasing Borrow Caps of Existing Markets - #25 by kimkio)), Seamless Protocol remains committed to adapting supply and borrow caps to sustain healthy protocol growth and market dynamics.

Introducing a New wstETH Market for ILMs

Aligned with Seamless Protocol’s vision ((link: Vision and Mission - Seamless Protocol) to deliver an all-encompassing and seamless DeFi experience, there has been increasing focus on developing Integrated Liquidity Markets (ILMs). As many have noticed, community contributions to the ILM code has been ongoing and nearing completion (link: https://twitter.com/SeamlessFi/status/1750924581575991778). With this, a dedicated wstETH market is proposed to optimize collateral parameters for the impending ILM launch.

Key information on the Custom Market:

• Enables optimized collateral parameters for ILM strategy contracts, enhancing capital efficiency with higher LTV and supply caps.
• How does it work
  • The market only accepts a wrapped version of the underlying asset
  • Only governance approved addresses can call the wrap function. These addresses are ILM contracts. Users never interact with this market directly.
  • Can be unwrapped by anyone, so liquidators can still liquidate bad debt in these markets as a last resort if an ILM is misbehaving. ILM strategies rebalance themselves, so liquidation should not occur and only provides an extra layer of protection for LPs. This is why the liquidation bonus is suggested to be higher
  • Prevents borrowing of the collateral, ensuring ILMs can rebalance effectively without market saturation hindering their operations.

Proposal:

As far as market parameter adjustments, the current proposal follows:

[1] Increase borrow caps across the following markets, specifically:

• USDbC - increase to 10,000,000
• WETH (ETH) - increase to 4,000
• cbETH - increase to 1,600

[2] And modify supply caps for the following markets:

• USDbC - decrease to 35,000,000
• WETH (ETH) - decrease to 20,000
• cbETH - increase to 3,200

More analysis on the markets to follow from community/experts.

In regards to the proposal to introduce a custom wstETH (gated wrapped) market, here are the specifications:

• Supply cap: 2000
• LTV: 80%
• LT: 83%
• Liquidation Bonus: 15%
• Isolation Mode: no
• Borrowable: no
• Flashloanable: no
• Collateral Enabled: yes

Resources/References:

ILM Github - GitHub - seamless-protocol/ilm: integrated liquidity market

ILM specs - ilm/SPECS.md at main · seamless-protocol/ilm · GitHub

How the wrapped wstETH would work - ilm/src/tokens/WrappedCbETH.sol at main · seamless-protocol/ilm · GitHub

Next Steps:

Based on currently established community governance standards, suggest the ~5 day period begins for open discussion period for the community to share its thoughts or suggestions.

[nubi]

seems like the community is on a roll today

[chaoslabs]

[EXT] Chaos Labs - Supply and Borrow Cap Recommendations - 02/09/24

Summary

A proposal to update the supply and borrow caps for:

• cbETH
• WETH
• USDbC

Analysis

Several assets across the Seamless protocol have reached high utilization of their supply and borrow caps.

It’s worth noting that a substantial portion of borrowing activity on the protocol involves users looping the same asset to capture yield. Below, We provide recommendations for increasing some of these caps after analyzing user positions and on-chain liquidity for each asset and utilizing our supply and borrow cap methodology.

cbETH

The supply and borrow cap for cbETH are currently at 100% and 84% utilization, respectively.

The recent increase in cbETH supply is mainly due to a single user supplying nearly 400 cbETH, amounting to 25% of the total cbETH supply.

Utilizing our supply cap methodology, we recommend doubling the supply and borrow caps to 3.2K and 1.6K

WETH

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

Utilizing our supply and borrow cap methodology and considering the current usage on Seamless and liquidity conditions, we recommend doubling the borrow cap to 4k WETH.

In addition, given the current supply cap utilization, we recommend reducing the supply cap to 20k WETH.

USDbC

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

Utilizing our supply and borrow cap methodology and considering the current usage on Seamless and liquidity conditions, we recommend increasing the borrow cap to 10M USDbC.

In addition, given the current supply cap utilization, we recommend reducing the supply cap to 35M USDbC.

Specification

Asset	Current Supply Cap	Recommended Supply Cap	Current Borrow Cap	Recommended Borrow Cap
cbETH	1,600	3,200	800	1,600
WETH	27,500	20,000	2,000	4,000
USDbC	66,000,000	35,000,000	5,400,000	10,00,000

[Smailov]

I fully support the initiative in the proposal. The adjustments to supply and borrow caps for key markets like wstETH, are timely and necessary steps to align with current market conditions and prepare for the ILM launch

[richyRNG]

I am also in support of this, and thank you for the deep analysis as always @chaoslabs .

As far as the proposal, adjustment of the caps seems to make sense, as this should potentially be a frequent/consistent proposal as market dynamics evolve and the platform continues to mature.

In regards to the second portion, the custom market, I believe this makes sense to setup the future ILM launch, and it appears the core contributors and community have generally taken a conservative approach to parameter setting, so long as the custom market follows a similar “conservative minded” approach would be supportive.

[lewis]

Really appreciate the consistent evaluation of these caps esp as new information comes to light/new features are slated.

With ILMs coming soon, this looks like a great proposal to update caps. Thank you @chaoslabs for the analysis and numbers. I feel that launch with a conservative approach makes sense with opportunity to adjust as time goes on.

[daryl]

This looks great to me. It aligns with supporting a healthy ecosystem in tune with the latest market conditions. Great in-depth analysis @chaoslabs . Really helpful in illustrating the rationale.

The community has been eagerly awaiting the ILMs, so the dedicated wstETH market is an exciting development. I fully support that, as well as anything else that would help expedite the launch of the highly sought ILMs.

From the info about the Custom Market, it seems like the ILMs are built with composability in mind, so that’s an exciting benefit which may mean that more ILMs can be launched shortly thereafter as well.

In my opinon, ILMs should be a major priority, along with the health of the existing markets, so I’d recommend these suggestions to be implemented swiftly.

[Ras]

Im in favour of the proposal as well

[xnp]

Very excited about the introduction of ILMs! Custom wstETH market makes a lot of sense to differentiate parameters from the regular market, and make it more suitable for the ILMs.

Also supporting the update of caps, nice analysis as always @chaoslabs

[wes_fred]

I would like to discuss speeding up the process for this proposal. Currently, it’s set for another 12 days, but it would benefit the community to move faster. With many contributors attending ETHDenver, it would be prudent to launch the first ILM prior to the conference or risk delaying the launch significantly.

To do this, I would propose using exceptional circumstances to “fast track” and start an on-chain vote, especially if we have the support of ~10 active DAO members. If the community supports this, we could kick off an onchain vote tomorrow.

The community is also finalizing a proposal to formalize the process for future fast track proposals (link). We can all discuss how a more formalized approach can be created in that thread!

[kitanovic]

I agree with this entirely. We should try to launch ILMs as soon as possible. Community is waiting for this for a long time!

[ForkingBlocks]

I’m in support of this proposal.

Markets are dynamic and the lending/borrowing pools on Seamless are no exception. I’m appreciative of the proposal and analysis from @chaoslabs in order to keep Seamless in a safe and useful position as the largest lending platform on Base. Being nimble with appropriate proposals while also thorough and expeditious with analysis will keep Seamless as the most useful lending on Base and ideally keep it in the leadership position of having the deepest pools. This proposal hits the mark in staying on top of what is needed for the platform and i’m in support.

Im pleased to see the consideration of ILMs and advance planning of the ILM launch to give it the best opportunity at success. Assuring the pools and assets needed for successful ILMs are in place and of appropriate size is a smart decision and i’m in support of putting those pools in the position to perform optimally when utilized in ILMs. I’m sure further tweaking will be needed when ILMs are live but getting the pools as close as possible while still maintain safe parameters is a good decision and i’m glad to see it accounted for here.

[Orynos]

Since analysis shows that it is best to alter borrow/supply caps, it makes sense to do it as fast as it can be done.

Regarding ILMs, the repo has been public for quite some time and the protocol would benefit greatly from a novel strategy. It is reasonable to deploy it sooner rather than later, so I support fast-tracking the request.

[ForkingBlocks]

Based on the timeline and potential positive impact of this proposal, I’m in favor of fast tracking it.

[whisp3r]

I agree with the fast track proposal. I commented on the fast track proposal in support – this seems like a good instance where fast track makes sense.

In terms of the borrow caps themselves in line with @chaoslabs recommendations and appreciate the in depth analysis – stoked you guys help out Seamless!

[xnp]

I support the fast track for this proposal to be able to start on-chain voting faster.

[richyRNG]

support the fast track proposition and to see if an onchain consensus can be reached. No other updates atm compared to my previous comments above

[Ras]

Although the fast track is not formally in place, I think we need to support to fast track this one on exceptional basis. We have a strict deadline that is ETHDenver, I believe Seamless shall be there with ILMs to raise its profile.

So I support to fast track it

[0xt1]

Thanks for the proposal! Fully support fast-tracking the launch before ETH Denver. It’s a great opportunity to showcase the innovation of Seamless. Let’s make it happen!

[nubi]

Also support the fast tracking - sounds like it would allow for a more smooth launch and closer support on the launch