tl;dr This proposal seeks to adjust the parameters of the sdeUSD cauldrons on Abracadabra Money by increasing the Maximum Collateral Ratio (MCR) ratio to 90% and setting the liquidation multiplier to 2%. These change s are motivated by recent developments that have significantly mitigated potential downside risks, including the integration of a special whitelisted role enabling direct sdeUSD redemption into deUSD, and increased sdeUSD-deUSD liquidity that will enhance user experience during leverage operations.
Background & Context:
The sdeUSD cauldrons are designed to allow users to borrow and leverage against sdeUSD collateral to earn both yield and potions. Previously, the protocol had concerns about the ability to quickly liquidate a large amount of sdeUSD in the event of a depeg, and, as such, applied conservative cauldron parameters which limited the growth of the cauldron. Since then, the Elixir team has introduced a special whitelisted role that grants the cauldron the capability to instantly redeem sdeUSD into deUSD at scale during the liquidation process. This added safeguard reduces the likelihood that liquidators will face compromised liquidity or value extraction challenges in a depeg scenario. Liquidation risks are significantly mitigated by this change.
In addition, the depth of sdeUSD-deUSD liquidity pools has grown to $9M on Balancer. This means that it will be easier and cheaper for users to create large leverage positions without facing excessive slippage.
Together, these improvements give the protocol stronger backstops and better end-user UX, allowing for a higher MCR and a more conservative liquidation fee.
Proposed Changes:
- Increase sdeUSD cauldrons MCR from 85% (6.66x max leverage) to 90% (10x max leverage):
By increasing the MCR, users gain more borrowing power against their sdeUSD collateral, improving capital efficiency and potentially attracting more borrowers to the protocol.
- Reduce Liquidation Fee from 7.5% to 2%:
Reducing the liquidation fee reflects increased confidence in the protocol’s ability to conduct safe and efficient liquidations. With the direct redemption mechanism and deeper liquidity, liquidators face less risk and complexity, so a lower liquidation fee still adequately rewards them while making the system more borrower-friendly.
Benefits:
- Improved Capital Efficiency: Raising the MCR to 90% allows borrowers to extract more value from their sdeUSD collateral, fostering a more attractive borrowing environment and potentially increasing loan origination volume.
- Enhanced Liquidation Safety: The ability to redeem sdeUSD directly into deUSD improves liquidation outcomes. Liquidators no longer need a high liquidation fee to compensate for uncertain or complex liquidation processes.
- Better Leverage Experience: Deeper sdeUSD-deUSD liquidity pools ($9M on Balancer) reduce slippage when leveraging up large positions.
Risks & Considerations:
- Higher MCR Increases Risk Exposure: While the improved mechanisms mitigate some risks, allowing borrowers to take on more leverage inherently increases the protocol’s exposure to collateral price swings. However, this risk is contained by the new liquidity redemption options and existing safety mechanisms.
- Liquidation Efficiency: Although the ability to redeem sdeUSD directly to stablecoins provides a strong safety net, it is crucial to monitor whether the 2% liquidation fee ensures that liquidations remain efficient and profitable enough for liquidators.
Next Steps:
- If this proposal passes governance, the Abracadabra team will update the parameters of the sdeUSD cauldrons accordingly.
- Post-update, we will closely monitor key performance indicators, liquidity depth, and liquidation outcomes. If necessary, adjustments may be proposed to ensure the protocol remains stable and competitive.
Voting
The current proposal follows the speedlaned AIP process. Voting will start in 24 hours, and will last 24 hours. Voting can be found here.