icETH Param Update #2- LR changes

Title : icETH Parameter Update #2 - Leverage Ratio Update

Status : Implemented

Authors : @sidhemraj, @allan.g

Created : 2022-07-08

Simple Summary

Update icETH leverage ratio parameters (Target, Max, and Min).

Abstract

Adjust the following parameters for icETH

  • Reduce Target leverage ratio from 3.10x to 2.75x
  • Reduce Minimum leverage ratio from 3.00x to 2.50x
  • Reduce Maximum leverage ratio from 3.20x to 3.00x

Motivation

Following the LUNA crash in Mid May, the stETH:ETH price deviated from the 1:1 exchange rate, hitting as low as 0.94 ETH per stETH in mid June. Widespread FUD around redeemability of stETH amongst retail investors and whale liquidations has resulted in massive drop in ETH TVL in the Curve stETH:ETH pool, which is the primary source of stETH liquidity in the DeFi ecosystem.

While there have been discussions to update aave risk parameters to avoid a liquidation cascade during volatile market conditions, the Product Pod at Index Coop wants to ensure that the icETH is protected from liquidation and that rebalancing is minimized by lowering leverage ratio parameters across the board and expanding the safe leverage ratio range that the product can float within in order to prevent NAV decay and save on gas costs.



For the above case, the Product Pod would like to implement the following parameter changes:

  1. Update Target leverage Ratio to 2.75. This would give us an additional 5 basis point cushion to tolerate further depeg in the short term, while avoiding liquidation. In simpler terms, at an LR of 3.00 a depeg of 10% (stETH:ETH Ratio of 1:0.9) would bring us closer to liquidation, while at LR of 2.75, we could tolerate a depeg of 15% in a very short time before being exposed to significant liquidation risk.
  2. Minimum leverage ratio to be updated 2.50, a 25 basis point gap from the new Target LR to avoid rebalances as a hedge to short term volatility.
  3. Max leverage ratio to be updated to 3.00x, a 25 basis point gap from the new Target LR to avoid rebalances as a hedge to short term volatility.

Minor changes to the icETH leverage ratios were made in mid May as a reaction to the stETH:ETH volatility, apart from the new set of parameter changes laid out in this post. Those changes were not posted on the forum as Product Pod is the methodologist for icETH and ICC has delegated the responsibility to the Pod to manage the risks.

Details of changes of Leverage Ratio changes since launch are laid down below :

Target LR Minimum LR Maximum LR
At Launch 3.10 3.0 3.20
May 3.00 2.8 3.10
July 2.75 2.5 3.00

Context

The Product Pod at Index Coop designed and maintains the icETH product, and parameter updates are part of the Risk Management function inside the Product Pod. The authors are contributors to the Product Pod.

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