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
stOSMO, or stride staked OSMO, represents a form of OSMO token that has 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 OSMO 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 stOSMO 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 stOSMO, 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 | stOSMO |
|---|---|
| Minimum Collateral Ratio | 160% |
| Liquidation Ratio | 150% |
| Mint Limit | $2MM |
Option 2
| Parameter | stOSMO |
|---|---|
| Minimum Collateral Ratio | 170% |
| Liquidation Ratio | 160% |
| Mint Limit | $3MM |
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 | stOSMO |
|---|---|
| Stability Fee | 0.75% |
| Liquidation Penalty | 10% |
| Minting Fee | $0 |
| Minimum Initial Debt | $50 |
Analysis
What is stOSMO?
- stOSMO refers to the staked version of OSMO, the native token of the Osmosis network. When OSMO tokens are staked in the Osmosis protocol for securing the network and participating in governance, they become stOSMO, indicating that they are locked and earning staking rewards. This staked form is often part of DeFi protocols to represent staked assets.
- The unbonding process for stOSMO involves unstaking your OSMO tokens, which were previously staked in the Osmosis network. This process converts stOSMO back into OSMO and typically includes an unbonding period during which the tokens are locked and not transferable. It takes 14 days for stOSMO to unstake.
Metrics Analysis and On-Chain Data Review
Markets
stOSMO currently has a circulating supply of 19.8MM 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 - stOSMO/OSMO | $42MM | $2.8MM | $7.8MM | $6100 |
| Shade Protocol | $360K | $6000 | $8000 | $850 |
Volatility
The following graph shows the frequency of day-over-day price changes of given magnitudes for WETH and stOSMO since stOSMO started trading. As shown in the figure, stOSMO has more frequent and larger price swings compared to WETH. stOSMO 30D volatility is estimated around 70%, whereas ETH’s stands at 66%.
- The maximum daily drawdown for stOSMO happened on 12/18/23 when the price dropped 11% from $1.8 to $1.6. The maximum daily drawdown for OSMO happened on 2022-06-13 when the price of OSMO dropped 31% from $1.3 to $0.9.
- stOSMO is a relatively new asset, its trading history lacks substantial market stress events.
- The time series below shows how stOSMO’s volatility has evolved since Jan 2023.
Daily Volume
The chart below shows stOSMO’s daily volume on the Cosmos blockchain. The median daily volume is $26k. As shown in the second figure, stOSMO’s volume has been stable except for the month of October in 2023.
Tail Risks Assessment
Unstaking process: There is a 14-day unstaking process for stOSMO. This could delay the liquidation of the asset and exacerbate the asset price drop and insolvency.
Recommendations
By integrating stOSMO, lnter Protocol 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, stOSMO holders gain additional utility for their assets beyond staking rewards. They can use stOSMO as collateral for loans, gaining access to liquidity while still earning staking rewards. They can use stOSMO as collateral for loans, gaining access to liquidity while still earning staking rewards.
The Osmosis DEX allows for swapping stOSMO to any assets on Osmosis, with a 2% depth representing $2.8MM and 10% depth representing $7.8MM. If the community would like to list the asset, we recommend the following parameters.
Parameters
General Recommendations
Stability Fee → 0.75%
Gauntlet suggests setting the initial stability fee to 0.75%, 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 | stOSMO |
|---|---|
| Minimum Collateral Ratio | 160% |
| Liquidation Ratio | 150% |
| Mint Limit | $2MM |
Option 2
| Parameter | stOSMO |
|---|---|
| Minimum Collateral Ratio | 170% |
| Liquidation Ratio | 160% |
| Mint Limit | $3MM |
Liquidation Ratio
We derive the liquidation ratio based on our worst-case scenario simulation. Based on the historical data, we have seen a maximum of ~31% draw down on stOSMO 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 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 31% 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 a liquidation threshold of 1.6, annualized volatility of 0.73 and a volatility scalar of 5 (high volatility), we get the collateral ratio of 1.5. The formula will ensure that 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 stOSMO-backed vaults. We have two options, one recommended an initial value of $2MM and another at $3MM at the recommended Liquidation Ratio. With a mint limit of $2MM, we would not expose the protocol at the risk of high price impact (<2% slippage for liquidations). We recommend to start with a lower mint limit and gradually increase it. As the protocol attracts more stOSMO 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