# Gauntlet Recommendations: Inter Protocol - Risk Parameter Changes (12/12/2023)

## Simple Summary

Gauntlet provides two options to the IEC to adjust the risk parameters for ATOM and stATOM. For ATOM, we provide the heat map for the potential insolvency at different liquidation ratios. We recommend reducing the liquidation ratio from 190% to 150% and the collateral ratio from 200% to 160%. For stATOM, we recommend reducing the liquidation ratio from 200% to 160% and the collateral ratio from 220% to 170%.

**ATOM:**

- Decrease ATOM minimum collateral ratio from 200% to 160%.
- Decrease ATOM liquidation ratio from 190% to 150%.

**stATOM:**

- Decrease stATOM minimum collateral ratio from 220% to 170%.
- Decrease stATOM liquidation ratio from 200% to 160%.

## ATOM Analysis

The ATOM IST vault, launched on June 27, 2023, now holds $19.9k in collateral, $1541 IST maintaining an average collateral ratio of 1291.5% on Dec 11th, 2023. ATOM is available in both the Cosmosis DEX and CEX. Its liquidity is not a concern based on the data gathered.

**Osmosis DEX Liquidity**

| Markets | 24-hour volume | 2% Depth (USD) | 10% Depth (USD) |
| --- | --- | --- | --- |
| ATOM/OSMO | $3MM | $500K | $1.8MM |

**List of CEXs with ATOM.**


We ran the simulation on ATOM based on the current positions in the vaults. This simulation employs a high-risk scenario observed during the $ATOM price drop in May 2022, which recorded a 55% drawdown over three days. We modeled the price drawdown for $ATOM in this scenario, with the supplementary assumption that liquidators could liquidate 50% of the collateral at once (can only liquidate 50% of collateral in a single day). The simulation is tailored to the vault's current collateral and mint amount.

The heat map also includes drawdowns for cases that are higher than 55% drawdowns as well.

**Insolvencies (in USD) by drawdown and liquidation ratio for $ATOM: Each time step can liquidate 50% of the supplied collateral.**


In a more lenient assumption, we assume that the entire collateral position can be liquidated in a single time-step transaction (within a single day). In this case, we have the following insolvencies by the liquidation ratio.

**Insolvencies by drawdown and liquidation ratio for $ATOM: Each time step liquidates 100% of the supplied collateral.**

In the above scenario, the insolvency is further reduced because we can liquidate all the supplied collateral faster, eliminating the chances for further price reduction.

## ATOM Recommendations

### ATOM **Liquidation Ratio**

Gauntlet recommends decreasing the ATOM’s liquidation ratio from 190% to 150%. With a 150% liquidation ratio, we could see a $0 insolvency with a 55% drawdown and a 100% liquidation size and a $2.26 insolvency with a 55% drawdown and a 50% liquidation size.

### ATOM **********Minimum Collateral Ratio**********

Gauntlet proposes lowering the minimum collateral ratio from 200% to 160% to boost demand for the protocol. This is calculated with the following formula:

$Collateral Ratio = LiquidationRatio * (1 + (1 - e^{-5 * volatility / 19.1}))$

For this calculation, we have a minimum collateral ratio of $1.9 * (1 + (1 - e^{-5 * 0.4 / 19.1}))$ = 160%

The formula calculates the minimum collateral ratio required to prevent user positions from being very close to becoming liquidatable based on the asset's volatility in the past year. The constants 5 and 19.1 are used to convert the asset's annual volatility to daily volatility. The -5 is for a 500% volatility multiplier (Black Thursday-type level). So multiply the current asset's volatility by 5 to simulate the asset's annual volatility on Black Thursday. Dividing by 19.1 is just dividing by sqrt(365), which converts that annual volatility to daily volatility. e^(daily volatility) gives the one standard deviation percent drop. The formula will ensure enough buffer between the liquidation threshold and the initial collateral padding for the black Thursday drop to prevent liquidations.

### ATOM **Mint Limit**

With the current position, we expect the VaR to be $2 or 0.3% of the current borrowed amount. Given the max mint limit of $1MM, the highest potential loss is $3300 if we maximize the IST mint amount.

The current utilization rate of the protocol is only at 1%. Given the above analysis, Gauntlet recommends keeping the mint limit at $1MM. We don’t recommend making any changes to the mint limit.

## stATOM Analysis

The stATOM IST vault, launched on Dec 07, 2023, now holds $1.72MM in collateral, $541K IST maintaining an average collateral ratio of 317% on Dec 11, 2023.

stATOM in Osmosis DEX has enough liquidity to support the current total debt position.

**Osmosis Liquidity on Dec 11th:**

| Dex | Markets | Total Liquidity | 2% Depth (USD) | 10% Depth (USD) |
| --- | --- | --- | --- | --- |
| Osmosis | stATOM/ATOM | $15MM | $1.1MM | $1.6MM |
| Astroport | stATOM/ATOM | $3MM | $42,000 | $265,000 |

The table below estimates insolvencies from a simulation based on historical data. This simulation employs a high-risk scenario observed during the $ATOM price drop in May 2022, which recorded a 55% drawdown over three days. We modeled the price drawdown for $stATOM in this scenario, with the supplementary assumption that liquidators could liquidate 50% of the collateral at each time step. The simulation is tailored to the vault's current collateral and mint amount.

The heat map also includes drawdowns for cases that are higher than 55% drawdowns as well.


In a more lenient assumption, we could assume that the entire position will be liquidated in a single atomic transaction. In this case, we have the following insolvencies by liquidation ratio.

**Insolvencies by drawdown and liquidation ratio for $stATOM: Each time step liquidates 100% of the supplied collateral.**

The current stATOM vaults have a total of $531k minted IST. If we experience a 55% price drawdown, we expect approximately $531k of stATOM to be liquidated to cover the debt with a liquidation ratio of 1.6. This is because our current collateral ratio is around 310% on average. For example, wallet 17 currently holds $402k of IST mint and it is at a collateral ratio of 332%. It will be liquidated if the stATOM price drops 55% when liquidation ratio is at 1.6. Based on the liquidity data from Osmosis, we could liquidate $531k of stATOM without significant slippage (2%). However, we expect insolvency to increase if our debt position continues to grow. Based on the DEX liquidity data shown above, we expect 10% slippage at $1.6MM trading volume.

Here is the expected insolvency of 55% drawdown when our existing IST minted amount doubles to $1.1MM, assuming the supplied collateral also increases proportionally. Due to the additional slippage, the insolvency would be much higher.


Therefore, we must closely monitor DEX's liquidity and current IST position. If the liquidity in the DEX doubles (2% depth from 1.1MM to 2.2MM), then we would expect the insolvency to reduce from $52,265 to close to ~$4000 when we set the liquidation ratio at 1.6. When the debt position is greater than the 2% slippage size, the protocol could do the following to attract more participants to deposit their assets into the pool. Some suggestions would be to incentivize through Yield Farming, establish Cross-Chain Integrations, form partnerships with other DeFi projects and platforms and solicit more Marketing and Community Engagement.

# **stATOM Recommendation**

### stATOM **Liquidation Ratio**

Gauntlet recommends decreasing the liquidation ratio from 200% to 160% to further incentivize Inter Protocol growth. With a 160% liquidation ratio, we could see a $67 insolvency with a 55% drawdown with a 100% liquidation size and a $2726 insolvency with a 55% drawdown and a 50% liquidation size.
The Inter Protocol currently has $55k in reserve as of Dec 11, 2023. This reserve can help offset the insolvency. The maximum insolvency coming from the liquidation ratio should be below the $55k reserve Inter Protocol currently has.

### stATOM **********Minimum Collateral Ratio**********

Gauntlet proposes lowering the minimum collateral ratio from 220% to 170% to boost demand for the protocol. The calculation formula is the same as the one showed above for ATOM.

$Collateral Ratio = LiquidationRatio * (1 + (1 - e^{-5 * volatility / 19.1}))$

For this calculation, we have a minimum collateral ratio of $2.0 * (1 + (1 - e^{-5 * 0.4 / 19.1}))$ = 170%

### stATOM **Mint Limit**

Given the above analysis, Gauntlet recommends keeping the mint limit at $2MM. The current utilization rate of the protocol is ~26%. We don’t recommend making any changes to the mint limit until the liquidity increases in the DEX.

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