[BIP-25] Increase bSTBL collateral factor to 90% for Bao Markets

Governance Proposals
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Summary

Increase bSTBL collateral factor to 90% to increase capital efficiency of baoUSD

Background

bSTBL is stable and reliable collateral but its collateral factor for minting baoUSD is 75%. The risk is minimal for large price movements due to the underlying assets being chosen for their stability and safety by the community. The collateral factor could be set to 90%, which leaves a 10% margin for liquidators to collect as a liquidation fee.

Goals

  • Increase the usage of bSTBL as collateral for baoUSD
  • increase baoUSD capital efficiency

Proposed Solution

  • Use the setcollateralfactor function on the Bao Markets controller for bdbSTBL (0xE0a55c00E6510F4F7df9af78b116B7f8E705cA8F, bao deposited bSTBL) to 90%

Risks

  • increasing the collateral factor from 75% to 90% increases the risk of bad debt from an underlying asset losing its peg
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OK, I know this BIP appears to be innocuous and non-controversial, but I think it would be a good idea to say a bit more about why this is necessary and beneficial, and also add a bit of context.

For example, maybe explain why the Collateral Factor was set to 75% in the first place and what has changed to make setting it at 90% a reasonable and necessary move. Was it 75% originally because there were riskier stables in the mix that have since been removed (making the current markets safter and more worthy of a higher Collateral Factor?).

And maybe say something acknowledging the current regulatory environment and the very recent news about Binance shifting USDC to its coin and etc and that notwithstanding all this the increase in Collateral Factor is still a safe and advisable move.

Admittedly I’m not deeply embedded in the inside ballgame of high level crypto but even those like me whose only source of info is Decrypt, Twitter, Discord and sketchy YouTube content are hearing that stablecoins are the next big target of US regulatory action, the Tether litigation is still pending, FTX uncertainty is still shaking the market, and there is lots of uncertainty everywhere shaking projects that only a month ago most of the community thought was safe as houses.

So with all this I’m wondering if its possible for more explanation/context to explain why the original 75% was necessary before, why the proposed 90% is beneficial and reasonable, and why the risks as identified in the proposal are outweighed by the benefits of the proposed change.

I’m not deep into CRV defi, and I don’t know myself whether a 90% collateral factor is standard for other similar products on CRV/Defi, but if this higher collateral factor is fairly standard for similar defi pools that would be a great thing to add to the info for context to help folks assess the risks and benefits of the proposal. And if it is on the riskier/higher end, then a brief explanation of why that’s OK would be beneficial.

Perhaps the risks really are negligible, but with all the uncertainty in the market at the moment I think adding more info and context to the proposal and discussion would be highly beneficial…especially in case some new unforeseen catastrophe occurs in the future that causes something to lose its peg (at which point the hindsight fingerpointing would be pretty severe). In this current environment of market volatility, hidden protocol vulnerability and risk-off dynamics, this proposal is leaning into higher risk (rather than away from risk) so I think some more info would be valuable.

Those were my thoughts. As usual, I display my ignorance for the benefit of my fellow normies with only the best of intentions. :)

3

Thank you for your feedback and constructive criticism. But I will be short.

Main reason it was set to 75% was to discourage lending and borrowing. We were still building the rest of the infrastructure around markets and veBao.

Because that wasn’t in place we felt we needed to discourage users from using our markets spending unnecessary funds in the meanwhile.

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Thanks for the question !

Collateral factor is in fact not related to Curve but more how risky a collateral is for lending / borrowing in a lending market.

As Fabiaz said, we kept CF low this year to let users experience and play with the markets and not getting burned with potential liquidation. Also, the markets were absolutely not attractive as no gauges, rewards or emissions were given for baoUSD.

For volatile tokens and collateral, such as ETH, having a lower collateral factor gives room to support and sustain volatility in the market without risk of liquidation at every moment. This is why DeFi tokens, ETH and any non-pegged tokens usually have lower CF.

Because bSTBL is comprised solely of stablecoins, we can effectively increase CF to 90%. We still have room to increase it if the liquidity is deep enough to sustain it, but because liquidity would be thin, bSTBL price could be manipulated and a variation in price could be seen. 90% for a stable token seems low risk, while increasing the borrowing rate.

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Thanks for the answer! The additional context helps!

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