CIP-14: Increase Hard Mode Vault Liquidation Ratio to 125%


Change the Liquidation Ratio of ETH, DAI, USDC, and WBTC hard mode vaults from 110% to 125%


We launched Hardmode vaults with institutions in mind, it allows to mint high amounts of TCAP with low collateral, and with the launch of Uniswap v3 pools, we saw the impact it made on the protocol. The peg was reduced significantly reaching a $5 difference from the secondary market.

This change created new scenarios where flash loans strategies were profitable on the protocol, the high peg difference and low collateral ratio created an environment where users could take a flash loan, create a vault and mint TCAP, and sell TCAP on Uniswap, with the profit pay the loan and leave the vault open. Once the peg stays close to the secondary market, the profit can increase by making another flash loan, repaying debt, and earning an additional 10%. The issue is that with current market conditions there is the possibility that these vaults get undercollateralized faster than the economic incentive aligns to liquidate them (having the peg difference be minimal).

We don’t want to put the protocol at risk, so we want to increase the Vault ratio for these vaults to 125% while we analyze the data and take more actions to reduce the peg. We have noticed that high liquidity and volume on Uniswap v3 do help. Normal vaults won’t change with this vote.


You can vote in Snapshot here: Snapshot


Something I forgot to include in this proposal is that we want to keep the same liquidation ratio and penalty, to do so according to the formula we need to increase the value of the liquidation penalty to 19%.


I agree, we should go ahead with this change and increase the liquidation ratio to be on the safe side.