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Dharma Votes Against Compound Prop 14

The Collateral Factor for wBTC should be increased more gradually than Prop 14 proposes.

Title: Set WBTC Collateral Factor to 65%
Proposer: Alameda Research
Dharma Vote: No

Rationale

We believe that wBTC is an important asset in DeFi and that it has a bright future as an asset in Compound. Nevertheless, we have concerns about the market liquidity of this asset, and argue that its Collateral Factor should increase much more gradually than this proposal.

Currently, there is a time delay on minting / and redeeming wBTC. This time delay is sufficient such that the relevant market liquidity for wBTC is not the broader BTC market but rather the wBTC market. Unfortunately, while BTC is in industry liquidity leader, wBTC liquidity is only ~500k per day (source). Market liquidity is relevant because during times of rapid downward price movement, liquidators must be able to sell off wBTC in order to cycle through liquidations.

As such, the relatively thin wBTC spot markets make the asset quite risky in terms of potential liquidation risk.

We’d advocate for a more cautious approach to this asset given its thin liquidity. Specifically, we wouls support increasing the Collateral Factor in a much more incremental fashion, and subsequently increasing the Collateral Factor as either a) market liquidity for the asset increases, or b) the time delay on minting / redeeming wBTC for BTC is markedly reduced.

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