Date: 02 February 2023
Author: Chutoro
Reviewed By: Tenzent
This is a proposal to extend credit lines to the following silos:
- LINK - extend 250k $XAI credit line
- LUSD - extend 500k $XAI credit line
- FRAX - extend 500k $XAI credit line
The following is individual assessments of each of the above assets based on our risk framework outlined in our previous proposal (Risk Framework and Approach to XAI Credit Lines ).
Chainlink
Name: Chainlink
Ticker: $LINK
Contract Address: 0x514910771af9ca656af840dff83e8264ecf986ca
Description: $LINK is the native token of the Chainlink protocol
LT: 85%
Absolute Parameters
Oracle: Chainlink LINK/ETH price feed
Liquidation: Silo’s liquidation engine can liquidate $LINK collateral efficiently.
Protocol-Wide Parameters
As discussed in SiloDAO’s adopted Risk Framework, no individual silo will receive a credit line extension exceeding 2,348,150 $XAI (1,643,705 $XAI after application of liquidity buffer).
Silo-Specific Parameters
$LINK has relatively high on-chain liquidity. Assuming we deploy the maximum credit line of 2,348,150 $XAI, this would imply the liquidation of 395,777 $LINK (2348150/0.85)
Simulating sales on Matchaswap indicate that swaps of this amount into $ETH would incur 5.22% slippage which would still be profitable to liquidate.
Applying the liquidity buffer of 30%, we will simulate the sale of 277,044 $LINK collateral which would imply a credit line of 1,643,075 $XAI.
Slippage is still relatively high at 3.26% but allows for a larger buffer in the event of liquidations.
Recommendation
Since $LINK’s on-chain liquidity is sufficiently deep, the maximum credit line we would be willing to extend is 1,643,075 $XAI, our Silo-Specific limit (Protocol-Wide Limit * 30% Buffer).
At the moment, we recommend extending a smaller credit line of 250,000 $XAI to gauge interest. We recommend assessing utilization and can adjust upwards towards our Silo-Specific limit as demand increases.
$LINK and $XAI’s on-chain liquidity must be closely monitored and managed - if there are significant decreases to TVL, this must be noted and credit lines burned if necessary.
Liquidity USD
Name: Liquity USD
Ticker: $LUSD
Contract Address: 0x5f98805a4e8be255a32880fdec7f6728c6568ba0
Description: $LUSD is an overcollateralized stablecoin by Liquity which is backed by ETH collateral
Liquidation Threshold: 90%
Absolute Parameters
Oracle: Chainlink LUSD/USD price feed
Liquidation: Silo’s liquidation engine can liquidate LUSD collateral efficiently.
Protocol-Wide Parameters
As discussed in SiloDAO’s adopted Risk Framework, no individual silo will receive a credit line extension exceeding 2,348,150 * Liquidation Threshold in $XAI. In the case of $LUSD, this upper limit is 2,113,335 $XAI.
Silo-Specific Parameters
$LUSD has relatively high on-chain liquidity across multiple exchanges.
Simulating sales on Matchaswap indicate that swaps of even 5,000,000 $LUSD for $ETH would only incur slippage of 0.9%.
As such, the binding constraint for a credit line to $LUSD is our Protocol-wide Parameters (i.e. $XAI on-chain liquidity) rather than $LUSD itself.
Recommendation
$LUSD is the largest proper decentralized stablecoin backed by only $ETH as collateral. It should be noted that $LUSD does have a history of upward de-pegs which can be accounted for by our liquidation engine. Given that on-chain liquidity of $LUSD is relatively high, we recommend a 500,000 $XAI credit line. We recommend reassessing utilization and adjust upwards to our Protocol-Wide Limit as demand requires.
We recommend continued assessment of on-chain liquidity of both $LUSD and $XAI to ensure that it remains within a safe range that will allow liquidations to occur as normal.
FRAX
Name: FRAX
Ticker: $FRAX
Contract Address: 0x853d955acef822db058eb8505911ed77f175b99e
Description: $FRAX is a partially-collateralized stablecoin released by Frax Finance
LT: 90%
Absolute Parameters
Oracle: Chainlink FRAX/ETH price feed
Liquidation: Silo’s liquidation engine can liquidate $FRAX collateral efficiently.
Protocol-Wide Parameters
As discussed in SiloDAO’s adopted Risk Framework, no individual silo will receive a credit line extension exceeding 2,348,150 $XAI (1,643,705 $XAI after application of liquidity buffer).
Silo-Specific Parameters
$FRAX has relatively high on-chain liquidity across multiple exchanges and is a constituent of FRAXBP, the Curve base-pair which $XAI is paired with. Since it is a base-pair, the only on-chain swap which is relevant is direct swaps in our XAI-FRAXBP Curve pool.
Simulating sales on Curve indicate that swaps at our protocol-wide limit of 2,348,150 $FRAX would incur slippage of ~2.4%.
Recommendation
$FRAX is the largest partially-collateralized stablecoin with a ~$1b market capitalization and a good history of not de-pegging.
Given the protocol-wide parameters were designed around being able to absorb maximum acceptable slippage on $FRAX, the protocol-wide credit line is our upper limit. Initially, we recommend the deployment of a 500k $XAI credit line that can be scaled up according to utilization. Frax is already inherently tied to XAI as our liquidity is attached to FRAXBP.
We recommend continued assessment of on-chain liquidity of both $FRAX and $XAI to ensure that it remains within a safe range that will allow liquidations to occur as normal.
