👻Aave: Should eleven (11) total risk parameters across seven (7) Aave V2 assets be updated?

Voting Recommendation by raho#0007

Summary:

This proposal is being brought forward to update eleven (11) risk parameters across 7 different Aave V2 assets.

Definitions:

• Loan to Value:

The Loan-to-Value (LTV) represents the amount of overcollateralization required for users to borrow assets. For instance, if a user deposits 1 ETH of collateral and the LTV is 0.75, then the user can borrow up to 0.75 ETH worth of another asset in the protocol. In Aave, the price of the other asset in ETH terms is provided by the Chainlink oracle, which is required to mark the loan on issuance. Within the Aave protocol, Loan-to-Values are set on a per asset basis and adjusted when market conditions change dramatically.

(Gauntlet)

• Liquidation Threshold:

The liquidation threshold is the ratio of lien value to collateral value that leads to a loan being eligible to be liquidated. For instance, if the liquidation threshold is 0.8, then when the bor- rowed quantity is worth at least 80% of the collateral provided, the lien can be liquidated. Note that the liquidation threshold can be different than the LTV value. By providing a buffer, the protocol can balance between having an aggressive liquidation policy (e.g. liquidation threshold = LTV) for volatile assets and a capital efficient policy for more stable assets.

(Gauntlet)

• Liquidation Bonus:

in order to incentivize liquidators to purchase collateral from at-risk and defaulted liens, the protocol provides an incentive, termed a liquidation bonus, to liquidators. This bonus comes in the form of a discount on the collateral purchased for the liquidator. For instance, suppose that 10 ETH is liquidatable and that 1 ETH = $2000 USDT. If the protocol allows liquidators to purchase the 10 ETH for 1800 USDT each, then the liquidation bonus used is 10%. Adjusting 10 this parameter as a function of asset volatility and liquidity is crucial for the safety of the protocol. If the bonus is too low, then during extremely volatile or illiquid conditions, liquidators might not be profitable even with the bonus. During these times, there can also be cascading, systemic effects from a lack of liquidations. For each loan that is liquidated, liquidators purchasing the collateral and selling it causes the price to further decrease causing further liquidations. On the other hand, if the bonus is too high, suppliers are losing out on profits to liquidators. Continual monitoring and adjustment of this parameter is crucial for optimizing the security vs. capital efficiency trade-off in Aave.

(Gauntlet)

Proposal:

If this proposal is passed, the risk parameters will be updated to the following assets, in the following way:

• CRV (Curve DAO Token)

  • Loan to Value

    • From 45% to 55%

  • Liquidation Threshold

    • From 60% to 65%

• FEI (FEI USD)

  • Loan to Value

    • From 50% to 60%

  • Liquidation Threshold

    • From 60% to 70%

• LINK (Chainlink)

  • Liquidation Bonus

    • From 7.5% to 6.5%

• MKR (MakerDAO)

  • Liquidation Bonus

    • From 8% to 7.5%

• SNX (Synthetix)

  • Loan to Value

    • From 40% to 45%

  • Liquidation Threshold

    • From 60% to 65%

• xSushi (Staked Sushi token)

  • Loan to Value

    • From 40% to 45%

  • Liquidation Threshold

    • From 60% to 65%

• UNI (Uniswap)

  • Liquidation Bonus

    • From 8% to 7.5%

These recommendations come from Gauntlet, who runs simulations on the current rates of Aave’s markets, and suggests parameter changes that reflect the standards set forth by the Aave community. These proposed changes help maintain the Aave Community’s overall risk tolerance for Aave markets which has been voted into place.(https://snapshot.org/#/aave.eth/proposal/QmT9T4Rfnh1Z2HYmMPXvtFotMK2vSxiXK8dKStg2b6n4gi ).

After the recent volatility that the crypto market has seen (specifically January 21-24, 2022), Gauntlet has produced a ‘Market Downturn Report’ on Aave assets (Full report here:https://governance.aave.com/t/market-downturn-gauntlet-risk-review-jan-2022/7190 ). After writing this report, Gauntlet proposes these changes.

A visual representation of these proposed changes can be found here:https://gov.gauntlet.network/aave

Recommendation:

I recommend that the Rabbithole metagovernance pod vote ‘Yes’ to these proposed parameter updates. These updates appear to be routine. Gauntlets risk adjustment proposals are in place to keep Aave users safe, while generating the most revenue for Aave, which aligns well with the Rabbithole metagovernance’s commitment to supporting positive sum governance proposals.

Proposal: https://snapshot.org/#/aave.eth/proposal/QmWGjPM2DfZU3pgxucmE2v4j7vY8hWUrcNYXMsiDSexVDh

Open Questions:

Feedback:

Execution status: Executed

Vote: Yes

Community Vote

• 25 Y

• 0 N

Pod Vote

• 20 Y

• 0 N