AMPL Compensation Distribution
Title: [ARFC] AMPL compensation distribution
Author: Chaos Labs & BGD Labs
Date: 2024-03-21
Summary:
We define the relevant aggregation framework to adequately compensate current aAMPL holders, i.e. AMPL suppliers within the Aave V2 market.
Motivation:
As previously discussed in a forum post, the existing bug in the aAMPL implementation has resulted in the aAMPL supply diverging exponentially from the total liquidity in the AMPL market. This discrepancy challenges Aave’s conventional logic, where aTokens typically represent the underlying interest-adjusted total supplied liquidity. Consequently, suppliers are unable to withdraw their rightful claims on the market. In this post, we propose a generalized framework to estimate the value owed to each supplier, assuming that the custom aAMPL implementation behaved according to its intended logic.
Given their role in developing the AMPL custom integration with Aave, initially, this proposal was to be led by the Ampleforth team. But as service providers of the Aave community, we are not aligned with them in terms of timing and responsiveness on a serious topic like this. This, in addition to the high volatility of AMPL, led us to propose this alternative path, focused on solving the situation as soon as possible for users of Aave.
Specification:
When the custom aAMPL implementation operates according to its intended logic, AMPL suppliers generate rebases R pro-rata with respect to the utilization rate at a given daily rebase time t, formally denoted as follows:
Naturally, borrowers will borrow more, i.e. the market will employ higher utilization rates, if AMPL rebase events are positive, leaving the suppliers with generally minimal realized rebasing, assuming the mechanism is working properly. In exchange for this conditional profit-accruing strategy, the AMPL market was historically parameterized such that borrowers paid very high interest rates to suppliers as utilization grew, as this implies a positive rebase is likely to occur.
The continuously compounded daily interest rate IR to suppliers (aAMPL holders) is defined as the following:
Visual Representation:
The provided graphs below compare the continuously compounded returns of a supplier since the market freeze (end of November 27th, 2022) under the assumption that the mechanism operates according to its correct implementation, with the current inaccurate aAMPL returns.
Moreover, we refine the parameterization of interest accrual for the “Correct aAMPL Returns” to integrate the values set before the decrease executed on February 5th, 2024. This adjustment was initially implemented to halt the persistence of exponential scaling in the aAMPL supply, shifting the daily rate at 100% utilization from 0.88% to 0.05%. By effectively reverting this change, it alters the “opportunity cost” linked to deposits in recent weeks, during which they accrued minimal interest. In an efficient market, high utilization rates would have occurred regardless, given the remarkably positive rebases. This comparison seeks to determine the current value of aAMPL in AMPL terms, normalized to a principal value of 1 at t_0.
Comparing the effective difference in value in percent terms over time:
As of today, it’s observed that according to the correct implementation, the current value of aAMPL would be worth approximately 30.436% of the circulating aAMPL supply, equivalent to 0.30436 AMPL per aAMPL. With a current aAMPL supply of 1,825,855 as of March 20th, 2024, excluding the Aave collector’s 71,497 AMPL, this translates to 533,973 AMPL.
Defining the Relative Value in USD Terms:
Currently, the value of AMPL is well above its targeted inflation-adjusted USD value from 2019. Additionally, the purchasing of AMPL on the spot market of such a large magnitude would be inefficient, given its relatively illiquid status and effectively altering the underlying economics of the asset. To provide a fair distribution mechanism, and thus account for the stablecoins’ expected value, we recommend denominating all AMPL claims in USDC according to the average price of AMPL since the market freeze, or $1.198 per AMPL. Thus, the USDC Owed would simply come out to AMPL Owed *1.198$, or $639,700 to be distributed pro-rata between aAMPL holders. The per-address distribution of claims can be found here.
Technical specification
From the technical side of the operation, the strategy will be the following:
- As commented before, USDC or any other stable coin is the recommended medium for the distribution of the target $639,700. To elaborate on the previous, the rationale is that using AMPL introduces more uncertainty on the final amounts, due to the extremely volatile and fragile nature of AMPL.
We think that the simplest way is to use the funds of the Collector (as recommended by treasury service providers), and later on decide if it makes sense to apply any slashing on the Safety Module. - The distribution will be done using the mechanism BGD created for the Rescue Mission project: a Merkle tree distribution where each eligible address will need to claim its tokens.
- We will study creating one separate distribution for really small holders on a non-Ethereum network, in order to make the claim cost lower.
- Initially, only non-smart contract addresses will be included, or those contracts that we clearly identify as able to execute the claim (e.g. Gnosis Safe). For the rest, we will study exactly how to distribute, but will take slightly more time.
- Withdrawals will be disabled for AMPL on Aave, as they will happen via the aforementioned distribution smart contract. The debt side will remain operational, in order to still be able to liquidate AMPL.
The final snapshot of all aAMPL eligible holders will be taken after withdrawals are fully disabled. - Considering that the problem is on a contract of Aave, but that the implementation was done by the Ampleforth team, we propose a 60% (Aave) 40% (Ampleforth) split on the total to be deposited on the smart contract for the distribution.
Technically, this will just mean that Aave should deposit on the distribution contract $383’829, while Ampleforth should do the same with the remaining $255’880.
Next steps
Similar to any other governance proposal of technical nature, this procedure will require the following 2 steps
- This ARFC proposal is to be voted on Snapshot, and the on-chain AIP factually starts the distribution. The ARFC will be created Tuesday 26th March, to leave some time for discussion before.
- If the previous Snapshot passes, the estimation for the creation of the on-chain AIP (starting distribution) is Tuesday 2nd April. Any delay will be properly disclosed in advance.
We appreciate feedback from the community.
Disclaimer
This proposal is created by Chaos Labs and BGD Labs as part of our respective service provider agreements with the Aave DAO, due to the highly technical nature of the problem and remediation.
Copyright
Copyright and related rights waived under CC0.