eIP 25: Decrease UNI and LINK Collateral Factors

Simple Summary

This proposal offers to decrease UNI and LINK collateral factors from 0.3 to 0 thereby removing them from the collateral tier.

Abstract

This proposal offers to decrease UNI and LINK collateral factors to 0. While these assets still pass the thresholds on smart contract risks, oracle security, decentralization and volatility, the current lack of activity for these assets creates a situation where there is limited upside to maintain their collateral status on Euler.

To echo what @seraphim mentionned in eIP 12 there appears to be limited activity derived from maintaining capital-efficient collateral factors on assets beyond USDC, USDT, DAI, WETH, WSTETH and WBTC.

Motivation

The objective of this proposal is to decrease systemic risks on Euler. We believe that UNI and LINK have not met the expectations in terms of activity generated. We believe that the risks stemming from keeping these assets as collateral outweigh the benefits.

Recent events have once again highlighted the risks of accepting less liquid tokens as collateral. Although the cost of manipulating UNI or LINK would be substantially higher than manipulating a token like Mango leaving these assets as collateral increases the risk profile of Euler with no clear upside for the protocol as these assets generate a minimal amount of fees.

Implementation

Contract	Method	Token	Token Address	Updates
governance	setAssetConfig	LINK	0x514910771af9ca656af840dff83e8264ecf986ca	collateralFactor:0
governance	setAssetConfig	UNI	0x1f9840a85d5af5bf1d1762f925bdaddc4201f984	collateralFactor:0

Liquidation risk assessment

The proposed decrease in collateral factors will lead some accounts to become undercollateralized. We ran an analysis to assess how these changes would impact accounts holding UNI and LINK as collateral. Our analysis aims at determining how many accounts would become at risk of liquidation if we update these parameters.

LINK analysis

Address	LINK collateral	Account at risk of liquidation - Post update
0xbdfa4f4492dd7b7cf211209c4791af8d52bf5c50	47,316.4	No
0x3f60008dfd0efc03f476d9b489d6c5b13b3ebf2c	1,801.5	No
0x9c0d1f4a029c46265831d120dee9cdc72f0ab3c3	349.3	No
0xd95689c3ffca42f91fd347164c4eb6558ba96d18	12.4	No
0x9f60699ce23f1ab86ec3e095b477ff79d4f409ad	0.9	No
0x0bf93ea5a1fa4ce3dd22c7ffd314462d3869777f	0.0	No

Six accounts currently borrow against their LINK collateral on Euler. The proposed collateral factor update would not lead to any of these account becoming eligible for liquidation.

UNI analysis

Address	UNI collateral	Account at risk of liquidation - Post update
0x139776871ee95f55d20b10d9ba5a0385451066cd	16,751.68	Yes
0x3f60008dfd0efc03f476d9b489d6c5b13b3ebf2c	1,390.26	No
0xa932e2c7d88497fdee9d87e5a450bae3874ff1a1	1,029.23	Yes
0x68db91d7be097c96a7e4034105bb4861434f7710	178.93	No
0x0003657abb17ede8c28bb40c81d20a6df35c9cb2	12.87	Yes
0x53695fae79a11f1e91aacb73ea37e36a8c09baba	0.02	Yes
0x0bf93ea5a1fa4ce3dd22c7ffd314462d3869777f	0.00	No

Seven accounts currently borrow against their UNI as collateral on Euler. Of these 7 accounts, 3 accounts would become at risk of liquidation due to the collateral factor update. These 3 accounts hold 17,793 UNI ($107K).

We propose to execute the collateral factor update one month after the snapshot vote closes. This delay will give time to affected users to update their positions accordingly.

Conclusion

Given the limited upside from maintaining collateral status and possibility of systemic risk stemming from bad debt, we think this change is appropriate given current market conditions.

If passed, the governance proposal will lead to lower health factors amongst some users, but according to our analysis no significant funds would be pushed into liquidation territory.