Background
Gauntlet’s goal with initial asset listings is to ensure that insolvency and liquidity risks are minimized and that when liquidations occur, they can be done healthily with incentivized liquidators. To be unbiased, Gauntlet will not explicitly support any asset listing but instead provide risk recommendations for the community. Gauntlet will assess a given asset’s liquidity and other market characteristics to be added to the protocol.
Gauntlet will relay our findings to the IEC and make parameter recommendations for Minimum Collateralization Ratio, Liquidation Ratio, Liquidation Penalty, Mini Limit, etc. For initial asset listings, the parameter recommendations are based on market and liquidity data. After 30 days of user positions developing on the protocol, Gauntlet will provide risk recommendations based on the actual usage data and market conditions using our risk models.
Summary
stkATOM, or staked ATOM, represents a form of ATOM tokens that have been staked in the Cosmos network. Staking is a process where holders of a cryptocurrency lock up their tokens to participate in network validation and governance, receiving rewards in return. By enabling ATOM holders to stake their tokens, Inter Protocol not only contributes to the security and efficiency of the Cosmos blockchain but also allows token holders to generate passive income through staking rewards. Furthermore, the integration of stkATOM within Inter Protocol’s financial ecosystem enhances its utility by allowing staked assets to be used in various DeFi applications, such as collateralization in lending protocols. This not only incentivizes participation in network validation but also enriches the DeFi landscape within Cosmos, promoting greater liquidity and financial flexibility for token holders.
If the community would like to list stkATOM, Gauntlet presents the following options for risk parameters: Minimum Collateral Ratio, Liquidation Ratio, and Mint Limit. The two options offer different mint limits. The community can decide which option is better suited for their needs.
Option 1
| Parameter | stkATOM |
|---|---|
| Minimum Collateral Ratio | 230% |
| Liquidation Ratio | 210% |
| Mint Limit | $150,000* |
We recommend to start with a Mint Limit of $150,000 due to stkATOM’s limited liquidity. However, we will monitor the stkATOM’s liquidity on a weekly basis and propose new mint limit if the liquidity improves.
Option 2
| Parameter | stkATOM |
|---|---|
| Minimum Collateral Ratio | 220% |
| Liquidation Ratio | 200% |
| Mint Limit | $100,000 |
This option provide a lower mint limit based on stkATOM’s limited liquidity currently in the pool. With a lower mint limit, the protocol could reduce the insolvency in a worsening scenario due to the slippage. We will monitor the stkATOM’s liquidity on a weekly basis and propose new mint limit if the liquidity improves.
It’s important to note if it is required for the protocol to increase the liquidation ratio or lower the mint limit to minimize risk, this action can result in a poor user experience. Therefore, relaxing the parameters should be done gradually over time as the market evolves and liquidation mechanisms are thoroughly tested.
General Recommendation
| Parameter | stkATOM |
|---|---|
| Interest Rate | 2.5% |
| Liquidation Penalty | 10% |
| Minting Fee | $0 |
| Minimum Initial Debt | $50 |
Analysis
What is stkATOM?
- stkATOM represents staked ATOM tokens in the Cosmos ecosystem developed by pSTAKE, a multi-chain liquid staking protocol. It allows ATOM holders to participate in network validation and governance, earning staking rewards in return. By staking ATOM, holders convert their assets into stkATOM, which represents their staked position and the accruing rewards. It was launched in January 2023
- Earn While Borrowing: Customers using stkATOM in lending protocols can continue earning staking rewards while their assets are used as collateral. This feature offers an attractive opportunity to leverage assets without missing out on potential staking income
- StkATOM enables users to unlock the liquidity of their staked assets. Instead of having their capital locked up in staking with no access, users can borrow against their stkATOM, providing them with liquidity and flexibility for other investment opportunities or financial needs
- For someone initiate unstaking process for stkATOM, the ATOM enters an “unbonding” period. This is a fixed duration during which your tokens are effectively in a locked state - you neither earn staking rewards nor can you transfer or spend these tokens. This unbonding process takes 21-25 days for stkATOM
Metrics Analysis and On-Chain Data Review
Markets
stkATOM currently has a circulating supply of 259,944 tokens. This asset is not listed on major centralized exchanges (CEXs) like Coinbase, Binance, or Gemini. Its circulating supply resides in the Osmosis and Shade Protocol.
Major markets for stATOM
| Markets | Liquidity (USD) | 2% Depth (USD) | 10% Depth (USD) | 24 Hr Volume (USD) |
|---|---|---|---|---|
| Osmosis - stkATOM/ATOM | $480K | $25k | $80k | $5100 |
| Shade Protocol | $100K | $2000 | $5000 | $3000 |
Volatility
The following graph shows the frequency of day-over-day price changes of given magnitudes for WETH and stkATOM since stkATOM started trading. As shown in the figure, stkATOM has more frequent and larger price swings compared to WETH. stkATOM 30D volatility is estimated around 73%, whereas ETH’s stands at 66%.
- The maximum daily drawdown for stkATOM happened on 6/11/23 when the price dropped 9.9% from $9.9 to $8.9.
- stkATOM is a relatively new asset, its trading history lacks substantial market stress events. However, it is price volatility is identical to stATOM (see below chart).
- The time series below shows how stkATOM’s volatility has evolved since March 2023.
Daily Volume
The chart below shows stkATOM’s daily volume on the Cosmos blockchain. The median daily volume is $13k. As shown in the second figure, stkATOM’s volume has been trending upwards through this year.
Tail Risks Assessment
Liquidity concern: stkATOM has limited on-chain liquidity on Osmosis. Its 24-hour trading volume is ~$5100, 2% market depth is $25,000 and 10% market depth is $80,000 for the stkATOM/ATOM pair. There is $480K liquidity in the pool for ATOM/stkATOM. In an event of liquidation, liquidators might not be able to find liquidity to liquidate stkATOM which could result in price slippage.
Recommendations
By integrating stkATOM, lnter can unlock the liquidity of staked assets, allowing users to leverage their staked ATOM without needing to unstake. This enhances the overall liquidity of the ecosystem. Also, stkATOM holders gain additional utility for their assets beyond staking rewards. They can use stkATOM as collateral for loans, gaining access to liquidity while still earning staking rewards. They can use stkATOM as collateral for loans, gaining access to liquidity while still earning staking rewards.
The Osmosis DEX allows for swapping stkATOM to any assets on Osmosis, with a 2% depth representing $25,000 and 10% depth representing $80,000. If the community would like to list the asset, we recommend the following parameters.
Parameters
General Recommendations
Interest Rate → 2.5%
Gauntlet suggests setting the initial interest rate to 2.5% (same as ATOM and stATOM), which could help promote growth as market stable coin borrow rate is around 4-5%.
Liquidation Penalty → 10%
The liquidation penalty incentivizes users to manage their vaults to avoid liquidation. We recommend initializing it at 10%. This penalty is higher than other major lending protocols on Ethereum, as there is currently limited liquidity on the Cosmos DEXs.
Minting Fee → $0
The minting fee is primarily a source of revenue for the protocol. It can be initialized at $0 to incentivize users to mint IST.
Minimum Initial Debt → $50
The minimum initial debt prevents users from opening vault positions that would be too small to service. Dust vaults that cost more to liquidate than they are worth are effectively dead funds; effectively the same as insolvent collateral. The minimum should be set such that liquidations are always profitable net of transaction costs. We recommend setting it to $50, to be robust to relatively high transaction costs when the chain achieves greater adoption.
Option 1
| Parameter | stKATOM |
|---|---|
| Minimum Collateral Ratio | 230% |
| Liquidation Ratio | 210% |
| Mint Limit | $150,000 |
Option 2
| Parameter | stkATOM |
|---|---|
| Minimum Collateral Ratio | 220% |
| Liquidation Ratio | 200% |
| Mint Limit | $100,000 |
Liquidation Ratio
We derive the liquidation ratio based on our heuristic worst-case scenario simulation. Based on the historical data, we have seen a maximum of ~40% draw down on ATOM in the past 2 years, and this represents the worst-case scenario in our analysis. We ran a hypothetical scenario simulation which is one user maxing out the Mint Limit, with a low collateralization ratio (at the point of getting liquidated). Based on the heuristic simulation result, we add an additional 10% to the liquidity ratio as a buffer to ensure the protocol would remain solvent ($0 insolvency) in the event of a 40% daily drawdown.
Minimum Collateral Ratio
We recommend the minimum collateral ratio based on the following formula:
For this calculation, we have
Where liquidation_threshold is the threshold at which a position becomes liquidatable, and volatility is the asset’s annual volatility.
The formula calculates the minimum collateral ratio required to prevent user positions from being very close to becoming liquidatable based on the past 1 year of the asset’s volatility. Given the Given a liquidation threshold of 2.0, annualized volatility of 0.73 and a volatility scalar of 5 (black Thursday level), we get the collateral ratio of 2.2. The formula will ensure that for the black Thursday drop, there’s enough of a buffer between the liquidation threshold and the initial collateralization buffer to prevent liquidations.
Mint Limit
The mint limit is the maximum amount of IST that can be minted across all stkATOM-backed vaults. We have two options, one recommended an initial value of $150,000 and another at $100,000 at the recommended Liquidation Ratio. Due to the limited amount of liquidity of stkATOM, we recommend to start with a low mint limit and gradually increase it. As the protocol attracts more stkATOM collateral and grows the liquidity volume, Guantlet can recommend increasing the mint limit on a weekly basis based on the latest data.
Next Steps
We welcome community feedback and preference on the two options.
By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos