Motivation
Jupiter has recently launched USDC borrowing to enhance the utilization of USDC within the JLP pool. This new structure enables JLP holders to leverage their JLP exposure via USDC borrowing, leading to a substantial increase in USDC utilization levels compared to the period before borrowing was introduced. Given the high demand and healthy market behavior, we recommend updating the lending risk parameters to increase capital efficiency while maintaining a limited risk exposure.
Borrow Limit
Below, we provide data on the USDC utilization levels and JLP prices from the last 12 months.
The chart above serves as a useful guide to estimate the safe maximum level of USDC utilization that can be allocated to borrowing without disrupting short position-taking. During the past 12 months, the 99.99th percentile of USDC utilization was approximately 20%, indicating that the safe threshold for USDC borrowing is 80%.
Revenue Increase vs. Potential Loss from Unavailable Liquidity: Lending out 80% of the JLP pool increases the platform’s revenue through higher borrowing fees and more efficient capital usage. However, this comes with the risk of reduced liquidity for short positions in approximately 0.1% of cases. During such rare events, unavailable liquidity could result in missed short opportunities or less effective hedging strategies, potentially leading to profit loss for traders. Balancing the potential revenue increase against this risk is critical to optimizing lending strategies without negatively impacting market participants’ ability to trade effectively.
Target Utilization Rate
In order to support the increase in borrowing utilization, we must adjust the Interest Rate Curve to reflect the new optimal setting. As the demand for short position utilization hasn’t changed significantly, we recommend maintaining the current buffer of 10% above the borrow limit and set the Target Utilization Rate to 90%.
Maintenance Margin
The launch parameters were set to maintain a large buffer between the maintenance margin and liquidation margin. Given the healthy market behavior and asset volatility, we recommend increasing the maintenance margin to 83% and keeping the liquidation margin at 86%, reflecting a 3% buffer.
Recommendations
| Parameter | Value |
|---|---|
| borrows_limit_in_bps | 8000 |
| maintainance_margin_bps | 8300 |
| target_utilization_rate | 9000 |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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