As proposed, raising LTV to 80% will increase collateral capital efficiency. This is not only needed to generate more loan revenue from collateral but to also make the borrowing side more comparative with other well-established lending protocol’s LTV ratios. Moreover, increasing the LTV could also encourage more people to take out loans due to capital efficiency.
The two major risks for doing this are:
- Liquidation queue risk
- bLUNA-LUNA liquidity risk
The last week has been the first major test since the May crash, demonstrating a lot has changed since then. Below takes a look at both these risks since the May crash.
Mainly the liquidation queue has tightened significantly since May with the launch of Kujira. There are also several others such as Lighthouse Defi launching to help with diversification of the queue and adding more liquidation bid liquidity.
During the 38% drop in the LUNA price on Jan 21 & 22nd (and 48%+ from top to bottom so far), liquidation premiums never topped 10% demonstrating greater liquidity depth in the liquidation queue
Liquidation premiums (exponentially smoothed):
This demonstrates the major strengthening of the liquidity bids and strength of the mechanism that should only get stronger over time as more demand for these products liquidation bid platforms increases.
In the past, bLUNA-LUNA spread substantially widen by ~ 46% during the May crash when luna dropped over 77%. However, since then the spread has developed built significantly more liquidity:
[Synthetic pool liquidity index that is built from aggregating and modeling of spreads showing you can buy/sell at any time with no serious price effects
Synthetic pool liquidity index that is built from aggregating and modeling of spreads showing you can buy/sell at any time with no serious price effects
Despite a 38% drop in LUNAs price on Jan 21 the bLUNA-LUNA spread widen by less than 6%. Looking at a synthetic pool liquidity index also shows the trend of liquidity depth of the pools is moving in the right direction. More importantly, there is pool diversity with listings on TerraSwap, LOOP, and Astroport that collectively hold over half a billion of combined TLV in the pools.
As more liquidity forms around the Astroport and LOOP bLUNA-LUNA pools, this spread will tighten more to further limit the liquidity risk.
Moreover, as more liquidation queue front ends pop up that work to automate liquidations to make it easier for users like lighthouse Defi is doing, the depth of the liquidity behind the liquidation queue will deepen and lower the premiums needed to successfully execute liquidations.
Side note, bETH LTV will stay the same since the depth of liquidity on the bETH-ETH pool isn’t deep enough to even warrant deeper research.
On the back end there will have to be some changes to how combined collateral loans will be calculated, ideally now on a minimum borrow ratio. This was something that will need also to be figured out for the new v2 borrow model and cross-chain anchor because it will onboard new collateral assets that have different LTV ratios.