So we are currently running some risk numbers for each vault type since we need to propose maximum debt ceiling parameters for MIP27 implementation (DC IAM) next week anyway.
The maximum debt ceiling figure should in our opinion be a function of liquidity, where DEX liquidity carries a higher weight, because auctions can be more efficient. After performing volume analysis for YFI we determined maximum DC for YFI to be 46m DAI, based on a selected ratio of 30% to 60% of CEX+DEX daily volumes. At 175% LR this would mean Maker would hold more than 11% of YFI market supply, which is not insignificant (ETH has only 2.3%). But this high ratio is mostly due to high YFI volumes compared to its market cap.
This means we don’t have anything against increasing DC towards 50m if volume metrics for YFI don’t worsen. However risk premium will rise if we were to attempt such an increase.
Below are stress test results for YFI-A, which shows risk premiums based on different price drop and auction slippage inputs at a debt exposure of 46m DAI. The conservative base case inputs we are using for YFI is -40% daily price drop and -40% auction slippage which yields 15% risk premium for 46m debt exposure. For current 20m debt exposure risk premium would measure around 7% (lower debt exposure normally leads to lower auction slippage).
This high risk premium is due to the largest vault (9.8m DAI debt), which has only 223% CR at the time of writing. This means that if we have a higher drop in price, this vault would quickly get liquidated and could lead to significant losses if auction slippage is severe.
Now, there are a lot of “ifs” here and that is why I wanted to show this matrix so it gets easier to decide for appropriate risk tolerance. But we need to be aware that such an increase could lead to double digit SF, which could dissuade current vault users from borrowing. As said in any case we will need to increase SF towards 7% which would equal Maker with Aave, from where a lot of users came initially. We can either hope CR distribution improves or hope that some YFI vault users are sophisticated enough to unwind before a large drop occurs. In such case lower than here calculated risk premium and SF could be justified, even at higher DC.