Enable Parachain Tokens as Vault Collateral (BNC, HDX)

9 Comments

Content
AI Summary

As highlighted in the March 2024 "A Path Forward" Interlay newsletter, another way we can/should increase Interlay vault capacity is to increase the tokens that can be used for vault collateral. People may not want to hold their assets in DOT/vDOT/USDT/USDC and prefer to hold another ecosystem token. So if we enable additional tokens to be used as iBTC vault collateral, it allows those token holders to also contribute their existing collateral to the Interlay vault system. InternalError's collateralization-analysis script has done a good job analyzing historical token prices and therefore calculating safe collateralization thresholds for each token. We could even choose slightly more conservative default thresholds if people are really concerned. But I'm confident that the Interlay vault implementation is robust enough to always maintain sufficient collateral backing for each iBTC minted regardless of market fluctuations.

So which tokens? The Interlay implementation unfortunately has a limitation preventing using tokens with 18 decimals in the money markets or as vault collateral because the supply cap and collateral ceiling paramers won't fit in storage. Therefore we're limited to non-EVM tokens (no GLRM, ASTR, CFG, etc). I would suggest that we immediately enable use of Bifrost BNC and HydraDX's HDX tokens as vault collateral. We've already integrated price feeds for BNC and HDX when their money markets were launched so I think only website updates would be needed. I think Phala's PHA should also be considered, although it will need an oracle price feed to support PHA in money markets and as vault collateral.

Results of the collateralization-analysis:

Start analysing hdx...
The suggested liquidation threshold is 115%
The suggested premium_redeem threshold is 125%
The suggested safe_mint threshold is 195%
Start analysing bnc...
The suggested liquidation threshold is 110%
The suggested premium_redeem threshold is 120%
The suggested safe_mint threshold is 160%

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Comments

wdAV...HYxD

I understand the motivation behind this is to increase the total capacity of vault operators and bring more iBTC into the ecosystem. While I do believe that adding HDX and BNC may very well achieve this in bull cycles, I worry about the impact such high-beta coins may have on Black Swan days, especially given that we have seen that premium redeems are ineffective on such days. Only a handful of vaults saw premium redeems during the last big drop in April. iBTC holders either do not want to part with their iBTC for a mere 5% or they do not act quickly enough to come to the aid of struggling vaults. We saw two large vaults get liquidated as a result. Already, the volatility of DOT and VDOT and their liquidation risk profiles are barely worth the vault rewards. I don't think enough BNC and HDX holders will deem it worth their risk for <20% APY.

I suggest lowering safe_mint thresholds for our stablecoins instead. They have proven to be resilient on large swing days. They, in fact, have the opposite effect, stabilizing our ecosystem when the price of BTC plunges and allowing users to quickly wrap more. We currently have around $650k in USDC and USDT. Lowering safe_mint from 150% to 130% would currently only add 1 iBTC in capacity, but could convince some vault operators to open up more stablecoin-backed vaults and it would be the equivalent of adding $125k in BNC and HDX collateral.

Edited

wd8x...FBr3

@wdAV...HYxD

I re-ran the collateralization-analysis for USDT and USDC and here are the results:

Start analysing usdt...
The suggested liquidation threshold is 110%
The suggested premium_redeem threshold is 115%
The suggested safe_mint threshold is 155%
Start analysing usdc...
The suggested liquidation threshold is 105%
The suggested premium_redeem threshold is 115%
The suggested safe_mint threshold is 165%

This actually means that we should adjust the safe_mint UP by 5-10%. Agreed, USDT and USDC themselves have been very stable during downturns. But it's the USDT/BTC and USDC/BTC ratios that would cause a vault to be liquidated. DOT and vDOT vaults have lower safe_mint thresholds because as crypto assets they're more correlated to Bitcoin.

There definitely were several premium redeems during the last downturn. The big liquidations I saw were on Kintsugi where perhaps there wasn't as much activity. I think the 5% is sufficient still and perhaps more premium redeems didn't occur because people hadn't been able to accumulate iBTC ahead of time.

I don't think enough BNC and HDX holders will deem it worth their risk for <20% APY.

We as Interlay gov/community simply enable the capabilities and then individual operators can make that decision themselves. I would be willing to run an HDX vault and I'll just set a high enough collateralization level to avoid large price swings causing a premium redeem.

Edited

Up 1

wdC2...9p9q

I am in favor of this for it will allow vault runners more options to choose over what asset they wish collateralize

alexei

i think this is an interesting proposal - the collateral ratios should be higher at the start imho to account for the volatility and limited venues to complete liquidations. So, start slow and grow.

One thing that I would want to see here is a DAO-DAO agreement where BNC and HDX commit to contributing back to Interlay. For example:

HydraDX: revenue share from the iBTC pools
Bifrost: revenue share based on the vDOT staked in iBTC vaults / iBTC usage in BNC products

The ultimate outcome here would be for DAOs to pay Vaults staked in their native token to secure BTC that DAO acquires as a diversification via iBTC - think, decentralized BTC custody. Rewards could flow eg via staking emissions in the native asset

Edited