👻Aave: Should six (6) total risk parameters across five (5) Aave V2 assets be updated?

Summary:

This Snapshot proposal has been brought forth by Gauntlet. Gauntlet recommends that 6 risk parameters across 5 Aave v2 assets be adjusted in order to reflect the Aave community’s moderate risk level (https://snapshot.org/#/aave.eth/proposal/QmT9T4Rfnh1Z2HYmMPXvtFotMK2vSxiXK8dKStg2b6n4gi).

Proposal:

https://snapshot.org/#/aave.eth/proposal/QmYJ3qNhuuxK4VsVabniUoB1XwThKQeq1wQtprPcBSzufW

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.

(Gauntlethttps://gauntlet.network/reports/aave)

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.

(Gauntlethttps://gauntlet.network/reports/aave)

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.

(Gauntlethttps://gauntlet.network/reports/aave)

Gauntlets Proposed Risk Parameter Updates:

• Aave Loan To Value

  • From 60% to 62.5%

• DPI Liquidation Bonus

  • From 8.5% to 7.5%

• ENJ Liquidation Bonus

  • From 7.5% to 6.5%

• FEI Loan To Value

  • From 60% to 65%

• FEI Liquidation Threshold

  • From 70% to 75%

• MANA Loan To Value

  • From 65% to 61.5%

(For more information on Gauntlet’s risk parameter update process please see links below)

Links:

Aave’s Moderate Risk Level Community Vote:https://snapshot.org/#/aave.eth/proposal/QmT9T4Rfnh1Z2HYmMPXvtFotMK2vSxiXK8dKStg2b6n4gi

Gauntlet’s Risk Dashboard:https://gov.gauntlet.network/aave

Gauntlets Parameter Recommendation Methodology:https://medium.com/gauntlet-networks/gauntlets-parameter-recommendation-methodology-8591478a0c1c

Gauntlets Model Methodology:https://medium.com/gauntlet-networks/gauntlets-model-methodology-ea150ff0bafd

Gauntlet’s Market Downturn Report:https://governance.aave.com/t/market-risk-monthly-february-2022-updates-and-review/7476

Recommendation:

I recommend that the Rabbithole metagovernance pod vote ‘Yes’ in favor of Gauntlet’s risk parameter updates. Gauntlet’s risk parameter updates are a continuous effort to maintain the Aave community’s moderate risk level, and contribute to the longevity of the Aave protocol!

Open Questions:

Feedback:

Execution status:

Vote:

Community Vote

• #Y

• #N

Pod Vote

• #Y

• #N