AIP #13.5: Interest rate adjustment for the CRV cauldrons

Governance Proposals Voted Proposals
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AIP #13.5: Interest rate adjustment for the CRV cauldrons

tl;dr Abracadabra is currently exposed to significant amounts of CRV risk. To address this, a strategy is proposed to apply collateral-based interest to both CRV cauldrons.

All proceeds from this strategy will be kept in our treasury and used to reduce the DAO risk associated with the liquidity conditions associated with CRV.

Background

Last month, a community member highlighted the risks around Abracadabra’s two CRV cauldrons in a forum post. Since then, Curve has faced several issues that have impacted its protocol TVL including the Conic hack, the JPEG’d hack, and the Curve hack.

Part of this hack involved the CRV/ETH pool, draining most of the on chain liquidity for CRV, changing significantly the liquidity conditions that brought to the listing of CRV as collateral on Abracadabra.

Additionally we have seen CRV collateral outflowing from our markets into markets with lower LTVs and higher interest.

This has impacted both the price of CRV as well as the liquidity around the token. As such, we are suggesting to increase the interest rate in order to reduce Abracadabra’s total CRV exposure to around $5M borrowed MIM.

Strategy Proposal

In order to avoid unnecessary compounding of principal interest, we would like to propose applying collateral-based interest, much like the DAO did with the WBTC and WETH cauldrons [Link]. We believe this solution will reduce negative externalities associated with such positions compared to a simple interest rate hike.

The effect of collateral-based interest is such that all interest will be charged directly on the cauldron’s collateral and will immediately move into the protocol’s treasury to increase the reserve factor of the DAO. Once in the treasury, the collateral can be converted to MIM via on-chain transactions or through one of our off-chain partners.

The proposal will have a base interest rate, which will be dependent on the combined outstanding principal of the both CRV cauldrons:

  • 0x207763511da879a900973A5E092382117C3c1588
  • 0x7d8dF3E4D06B0e19960c19Ee673c0823BEB90815

This will be combined with an interest rate multiplier which will be dependent on the collateral ratio of the cauldron. With these two factors, we believe we can maximize chances of full principal recovery.

Principal Base Interest Rate
$10M-$18M 200%
$5M-$10M 100%
$0M-$5M 30%
Collateral Ratio Interest Rate Multiplier
<= 40% 1x
<= 50% 5x
<= 60% 10x
<= 70% 25x

Given the current outstanding principal is $18M, the base rate would be 200%. At this interest rate, the loan would be fully covered within 6 months. As principal is repaid, the base rate would decrease.

If the collateral ratio were 40%, the base interest rate would not change. If the collateral ratio were 45%, then the base interest rate would be multiplied by 5. At the current outstanding principal, that means the loan would be fully covered within ~1.2 months.

Note: the current collateral based interest is applied in addition to the base $MIM interest rate highlighted in AIP #13.1.

Resources

https://forum.abracadabra.money/t/aip-13-add-a-crv-cauldron/4055
AIP #13.1 - $CRV Interest Rate Adjustment

https://forum.abracadabra.money/t/risk-assessment-increase-of-crv-cauldron-interest-rate/426

Voting

Due to the time sensitive nature of this proposal, which reflects the volatile evolution of CRV liquidity, the following proposal is already posted on snapshot and live now.

Voting will continue for 46 hours.

It can be found here.

At the end of the 46 hours, if the proposal passes, the new CRV interest rates will be applied to both CRV cauldrons immediately.

Voting ended, and the proposal has not passed.

2 Likes
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Responding to this incident perfectly!! will be nice to see things get back to normal.

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Given the hostility on CT about this topic , I’d be open to hearing from curve borrowers about the level of “fairness” they see in the cauldron conditions and if their is a solution they would propose to dilute the exposure to CRV illiquid conditions , and or deleverage to necessary liquidity conditions. Also, a timeframe they might need to position themselves. Id be open to extending this discussion for an additional 72 hours. I think the rate conditions reflect market conditions seen elsewhere in the market. I think this proposal does what it can to assist in safely deleveraging this cauldron. I am in favor of this proposal.

It’s important to understand that from a protocol revenue standpoint - my vision for abracadabra does not want to push this vote, as it is clearly not beneficial for the user for such harsh adjustments to be made. I’m voting yes to support the teams analysis of the way they see to most safely deleverage the cauldron. If curve borrowers won’t do that for themselves, the protocol must take action.

I’d like to add, on UX cauldron pages, standard terms of the cauldron should be clearly visible for defi actors to see as they interact with the product. We cannot trust users to understand the code beneath the products , or fully read documents. Adding a layer of protection to the user for their own understanding would be beneficial.

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Here we also share some of our thoughts in this Tweet for this AIP

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the vote is likely not passing, a new proposal and voting are now live on the forum

1 Like