MIP-7┃Reduce USDC vault's liquidation bonus on each chain

Summary: This proposal aims to reduce the USDC vault’s Liquidation Bonus on each chain.

Context: First, With the recent MCR adjustment on USDC, when a vault is up for liquidation, the Liquidator takes 1% from the Safety Reserve because the Liquidation Bonus is at 5% at this moment (this problem is specific to the Ethereum chain for now, but there is also a risk on the Fantom chain). The second reason is that USDC liquidity is quite good on all chains, so reducing the liquidation bonus on each chain wouldn’t be a problem for the Liquidator.

Rationale: This is why we propose to reduce the liquidation bonus to 3% on USDC vaults of each chain.

A drop in the Liquidation bonus means fewer incentives but the liquidation will still be profitable for the Liquidator because the amount of liquidity available determines how fluently liquidators can sell the liquidated collateral into the market. This factor is also important for how much market impact the liquidator’s behavior will have on the asset price. Large liquidation bonuses increase the regime in which the incentives are counterproductive. A lower liquidation bonus can mitigate depositor losses while maintaining a low risk of insolvency.

Means:

• Human resources: If the proposal is approved, this will need to adjust USDC vault’s liquidation bonus

• Treasury resources: There is no treasury cost.

Technical implementation:

• Update USDC vault’s contract on each chain.

Voting options:

• Accept reducing the liquidation bonus
• Against reducing the liquidation bonus
• Abstain

Quorum : 5M vMIMO