Summary
This proposal increases the liquidation discount for the following LlamaLend markets:
| Market | Old Liquidation Discount | New Liquidation Discount |
|---|---|---|
| CRV-long (Ethereum) | 8% | 12% |
| ARB-long (Arbitrum) | 8% | 10% |
| ARB-long2 (Arbitrum) | 8% | 10% |
Existing positions will not update to the new liquidation discount until the borrower interacts with their position. This update will affect all new borrows and existing borrows only after there is an interaction (e.g. borrow more, repay debt, supply/withdraw collateral).
Abstract
This proposal introduces a coordinated parameter update across several LlamaLend markets to improve risk alignment following the October market volatility. It follows two earlier DAO actions:
- the loan discount update for the CRV-long market and
- the Loan Discounts update in LlamaLend Markets on Arbitrum, Optimism, and Fraxtal .
While those measures addressed minimally invasive adjustments to the borrowing power (i.e. loan discount) of these collaterals, this proposal focuses on the remaining structural adjustments needed to ensure consistent and conservative parameterization across markets.
Liquidation discount determines the loan-to-value when a borrow position becomes subject to liquidation. Increasing this value results in a more conservative parameterization whereby positions enter liquidation at a higher LTV, allowing more buffer for liquidations to successfully process. LlamaLend was designed not to “rug” users through a parameter change that might force them into liquidation. Therefore, these updates will not liquidate positions, but will apply on next user interaction with the controller. Existing users should be mindful of this parameter update when making an interaction following the execution of this proposal.
Motivation
The October 10 event provided a clear stress test. By the updated settings, we:
- Improve market resilience against short-term shocks
- Prevent recurrence of isolated bad-debt incidents
The proposed parameter updates adjust the liquidation discount parameters across selected LlamaLend markets. These changes aim to enhance risk management and strengthen liquidation safety without causing any immediate on-chain impact. It is important to note that the liquidation discount is inversely correlated with position health; therefore, we have analyzed all existing user positions in markets where the liquidation discount has been increased.
- Positions are not automatically affected upon upgrade. Borrower health is recalculated only when a user interacts with their position (e.g., adding/removing collateral, repaying, or borrowing) and only if the user is currently not in soft-liquidation.
- No immediate liquidations occur at the moment of parameter change. The new configuration becomes effective upon the next interaction with the controller contract. Until then, positions retain their previous health state.
- Health re-evaluation upon interaction. When borrowers next perform an on-chain action, health will be recomputed using the new parameter values. For borrowers already near their health limit, this recalculation could move their position slightly below zero, requiring a small repayment or collateral top-up to remain safe.
This approach allows for a grace period following governance execution, ensuring no borrower is liquidated purely as a result of parameter updates. The following section quantifies this potential effect across all borrower positions, confirming that no users are expected to fall below the liquidation threshold under the new parameters.
Analysis
Introduction
This proposal presents a selective parameter reconfiguration across certain LlamaLend markets to address observed risk underestimation during recent volatility. Updated simulations and post-event diagnostics show that some market configurations can be improved.
The adjustments proposed here refine the liquidation discount settings in the most affected markets, ensuring more robust risk management without altering overall system behavior or affecting borrowers where unnecessary.
Findings and Recommended Actions
| Market | Liquidation Discount | Optimal Liquidation Discount | Proposed Action |
|---|---|---|---|
| CRV-long (Ethereum) | 8% | 12% | Increase to 12% |
| CRV-long (Arbitrum) | 12.5% | 12% | Increase to 12% |
| FXS-long (Fraxtal) | 12.5% | 11% | No action |
| OP-long (Ethereum) | 12.5% | 12% | No action |
| ARB-long (Arbitrum) | 8% | 10% | Increase to 10% |
| ARB-long2 (Arbitrum) | 8% | 10% | Increase to 10% |
- Reconfiguration proposed: CRV-long (Mainnet & Arbitrum), ARB-long , ARB-long2
- No immediate action: CRV-long (Fraxtal & Optimism), FXS-long (Fraxtal), OP-long (Optimism)
- No action (legacy debt): SQUID-long, FXN-long, UwU-long — existing bad debt unrelated to recent volatility
The approach prioritizes empirical justification and minimizes user disruption while laying the groundwork for future standardization across all LlamaLend deployments.
Market Analysis & Simulations
CRV-long
| Parameter | Current | Proposed | Change |
|---|---|---|---|
| Liquidation Discount | 12.5% | 12% | −0.5 pp |
| Loan Discount | 15.5% | 20% | +4.5 pp |
ARB-long
| Parameter | Current | Proposed | Change |
|---|---|---|---|
| Liquidation Discount | 8% | 10% | +2 pp |
| Loan Discount | 11% | 21% | +10 pp |
FXS-long
| Parameter | Current | Proposed | Change |
|---|---|---|---|
| Liquidation Discount | 12.5% | 11% | −1.5 pp |
| Loan Discount | 15.5% | 21% | +5.5 pp |
OP-long
| Parameter | Current | Proposed | Change |
|---|---|---|---|
| Liquidation Discount | 12.5% | 12% | −0.5 pp |
| Loan Discount | 15.5% | 17.5% | +2 pp |
Impact on Borrowers
Methodology
To evaluate potential borrower-level effects, we analyzed on-chain data from the Curve Prices API, following the health logic described in the Curve Controller documentation.
All collateral, oracle, and band parameters were held constant; only the liquidation discount was modified to isolate its direct effect on user health.
For each borrower, both the current (health_full) and adjusted health were computed.
If a position’s health were to move from positive to negative under the new LD— ceteris paribus—it would be flagged as potentially at risk.
The underlying data snapshot was taken on October 31, 2025. While the CRV price has remained broadly stable, borrowers should note that interest accrual and soft-liquidation drift may have altered individual health values since then.
Therefore, the results below represent a point-in-time analysis, not a live system state.
Results & Borrower Recommendations
Simulation results confirm that no active borrowers across all the reviewed markets would fall below the liquidation threshold following the proposed LD increases.
All positions remain above the safety margin, and no immediate action is required from the users.
However, as noted in the Disclaimer below, these results are based on a historical snapshot. While this proposal itself does not immediately impact on-chain positions, future market fluctuations or borrower activity may still change health values as usual, independent of the parameter updates.
Operational Notes
Although the liquidation discount updates do not immediately push any positions into negative health, borrowers with low health ratios are advised to exercise caution when interacting with their positions. In general, borrowing more is not recommended to keep the position healthy. The following notes outline how health can be increased:
- The liquidation discount for a borrower’s position is updated only when:
- The position is not currently in soft-liquidation, and
- The borrower performs a
repay()transaction.
- By contrast, calling
add_collateral()can update the liquidation discount even if the position is in soft-liquidation.
Due to this distinction, borrowers intending to adjust or safeguard their positions should prefer using repay() rather than add_collateral() immediately after the parameter change. This approach minimizes the chance of unintentionally triggering a health recalculation under the new parameters.
Expected Effects After the Parameter Change
- Positions with positive health remain unaffected unless interacted with.
- Borrowers who do not interact with their positions will remain under the existing parameters until their next transaction.
- Users may experience a slight health reduction when interacting after the change. This shouldn’t trigger any hard liquidations under the conditions in which the analysis was performed.
Disclaimer
All borrower-level data and health calculations in this analysis are based on a snapshot taken on October 31, 2025.
While the CRV price has remained broadly stable since then, positions may have evolved due to interest accrual, soft-liquidation losses, or other market dynamics that occurred afterward.
Therefore, these results represent only a point-in-time analysis and may not fully reflect current borrower states.
Borrowers are strongly advised to adopt a conservative approach and review their positions directly before taking any action, as front-end interfaces may not immediately reflect the updated liquidation parameters following implementation.
Vote Actions
ARB_BROADCASTER = "0xb7b0FF38E0A01D798B5cd395BbA6Ddb56A323830"
ARB2_CONTROLLER_ARB = "0xeCF99dE21c31eC75b4Fb97e980F9d084b1d8Da8f"
ARB_CONTROLLER_ARB = "0x76709bC0dA299Ab0234EEC51385E900922AE98f5"
CRV_CONTROLLER = "0xEdA215b7666936DEd834f76f3fBC6F323295110A"
ACTIONS = [
# Set CRV-long Params
(CRV_CONTROLLER, "set_borrowing_discounts", 200000000000000000, 120000000000000000),
# Set Arbitrum Params
(ARB_BROADCASTER, "broadcast", [
(ARB2_CONTROLLER_ARB, encode("set_borrowing_discounts(uint256,uint256)", 210000000000000000, 100000000000000000)),
(ARB_CONTROLLER_ARB, encode("set_borrowing_discounts(uint256,uint256)", 210000000000000000, 100000000000000000)),
], 500000, 1000000000),
]
def encode(sig: str, *args):
x = web3.keccak(text=sig)[:4] + encode_single(sig[sig.find("(") :], args)
return x.hex()