Gauntlet Recommendations: Inter Protocol - New Mint Limit stATOM (12/04/23)

Background

Gauntlet provides the following options to the Inter Protocol to adjust the risk parameters for stATOM, based on the latest liquidity data.

Option 1

  • Increase the Mint Limit for stATOM to $1MM

Option 2

  • Increase the Mint Limit for stATOM to $1.5MM

Option 3

  • Increase the Mint Limit for stATOM to $2MM

Analysis

At Gauntlet, we previously recommended conservative parameters for the launch of stATOM. This allowed liquidity to flow into the contracts before increasing risk thresholds.

The stATOM vaults now have ~$495k minted IST with an average collateralization ratio of 295%. Gauntlet recommends three options for updating the mint limit for stATOM to drive more capital into the Inter protocol.

Analysis

Markets

Major markets for stATOM

Markets Liquidity (USD) 10% Depth (USD) 2% Depth (USD)
Osmosis ATOM/stATOM $17MM $1.05MM $800k
ShadeSwap ATOM/stATOM $450K $50K $20K

Recommendations

The on-chain liquidity has increased substantially after the initial launch of the token. Based on a 10% depth number of $1.05MM currently in Osmosis. We have three options for the mint limit recommendations: $1MM, $1.5MM, and $2MM.
Since the price impact of 10% is around $1MM, going with a mint limit of $1MM could result in the lowest potential insolvency when we experience a severe price drawdown. The insolvency amount could be exacerbated if the liquidation exceeds the pool liquidity and causes further price drawdown.

The Insolvency based on Different Price Drawdowns

The Liquidations based on Different Price Drawdowns

Parameters

Option 1

  • Increase the Mint Limit for stATOM to $1MM

This option’s potential insolvency for a 55% price drawdown is $24k. The total liquidation at this drawdown is around $700k. The insolvency for a 60% drawdown spikes to $100K with a liquidation of $670K.
Based on the liquidity available in the Osmosis DEX, a liquidation of $700K would not cause a significant price impact (<2%).

Option 2

  • Increase the Mint Limit for stATOM to $1.5MM

This option’s potential insolvency for a 55% price drawdown is ~$27k. The total liquidation at this drawdown is around $1.1MM. The insolvency for a 60% drawdown spikes to ~$100k with a liquidation of $1MM.
Based on the liquidity available in the Osmosis DEX, a liquidation of $1MM can result in a price impact of 10%.

Option 3

  • Increase the Mint Limit for stATOM to $2MM

This option’s potential insolvency for a 55% price drawdown is ~$35k. The total liquidation at this drawdown is around $1.5MM. The insolvency for a 60% drawdown spikes to ~$190k with a liquidation of $1.3MM.
Based on the liquidity available in the Osmosis DEX, a liquidation more significant than $1MM can result in a price impact greater than 10%. This could cause considerable price slippage in the DEX.

Gauntlet suggests a $1.5MM Mint Limit based on the current liquidity available in the pool. This ensures that the lower collateralized positions can be liquidated safely in a severe market downturn and minimize insolvencies. Since slippage could be relatively high for liquidating significant positions of stATOM, a mint limit of $1.5MM reduces the potential price impact in a market downturn. This recommended mint limit minimizes losses in an infinite mint attack (and other attacks like oracle manipulation).

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The Economic Committee has been actively monitoring the growing demand for stATOM and has raised the mint limit to $2m. At the time of writing it has a utilisation rate of 27.09%. We will continue to monitor the performance of stATOM vaults.

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