Proposal: Reduce default borrow options on Abracadabra to promote more responsible leverage

Copying what I initially proposed in Wonderland as it actually belongs here in Abracadabra

Over the past two weeks we’ve seen the price of TIME tumble. This is likely in big part due to leverage liquidations. Liquidations are costly to Wonderland in multiple ways:

  • Wonderland supporters who are liquidated lose money
  • The price of TIME can fall quickly and drastically
  • The drop in price of time can make interested people afraid of investing in Wonderland

Abracadabra is putting novice investors at risk by having a very high default borrow rate on Abracadabra. The price of TIME is likely to remain volatile and it’s easy for novice investors to overlook just how likely it is for them to get liquidated.

The proposal is to reduce the default borrow options on Abracadabra from (25%,50%,70%)
to (10%,25%,50%) to promote more responsible use.

Alternatively we can default borrowers to an amount that leads to the liquidation price being half of the backing per time. So for example today’s backing per time is $1730. Abracadabra would show a default borrow amount relative to the collateral deposited that would lead to a liquidation at $865.

Either way, borrowers would still have full freedom to borrow as much or as little as the protocol allows. We’d just show more conservative default options so that novice investors don’t borrow more than what is safe.

We shouldn’t be making decisions based on “likely”, if we propose making a drastic change to a core revenue generating mechanism then we need to have the numbers laid out so we can model the implications. It’s really hard to say what extent less than $100 million in loans contributed to the price depreciation of an inflationary asset like TIME during a bear market, after a very fast run up.

This protocol and the wonderland protocol are independent entities, Liquidations are costly to wonderland to some unknown extent; however, they aren’t costly to this protocol. Perhaps that part of the post should be in the wonderland forum.

As for the concern about uninformed investors, it seems this is a concern for this protocol, regardless of the asset users have collateralized.

Education could be a measure that is undertaken without the risk of undermining revenue generation. The UI makes a note to read the docs when leveraging, perhaps a similar pop-up can be used when borrowing over a certain proportion of collateral in higher volatility cauldrons. the asset plays a significant role in what a safe loan is as well.

Folks should be free to borrow what they see fit for their risk tolerance, we are all adults. I do think we can do a better job of educating the user, eventually regulation will make educating users a significant part of adoption into the mainstream for crypto and Defi like with many new industries and we should be prepared for this eventuality. it also lends credibility to the protocol and is a factor in competing for new users as the competition for this type of service gets more competitive.