Summary
Aave’s top priority is migrating liquidity from V2 to V3, focusing on the Ethereum deployment due to its significant liquidity share. To this end, we will soon release a structured migration plan based on four key pillars.
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Adopt a “case-by-case” approach to evaluate individual use cases and take appropriate actions accordingly.
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Address any constraints related to existing positions.
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Prioritize migration goals over timelines.
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Employ an iterative process to improve outcomes and make more informed decisions using data. We look forward to sharing this plan with the community and working collaboratively toward a successful migration.
Case-by-case approach
The transition from V2 to V3 involves a myriad of scenarios and considerations, and different assets require tailored risk management strategies. As a result, we believe it is crucial to examine the relevant risk controls for each case separately, prioritizing a use-case-first approach over a toolkit-first approach. Therefore, we are committed to assessing risk parameters for each asset to ensure that adequate measures are taken to manage risks effectively.
We are considering various asset classes for migration from V2 to V3, each with unique characteristics and requirements. The asset classes include:
- Long tail assets may require targeted risk management strategies to promote their migration to V3.
- Blue-chip tokens will likely migrate naturally over time due to their strong market demand and lower risk profiles.
- Stablecoins and stablecoin E-Mode considerations may require specific approaches to ensure stable liquidity migration and minimize potential impacts on price stability.
- LSDs and LSD E-Mode considerations require a thorough analysis of the associated risks and strategic risk management plans to facilitate the migration of liquidity.
- Isolation Mode assets, where cross-collateralization is no longer available, necessitate tailored risk management strategies to encourage their migration to V3.
- Ongoing revenue potential to the protocol from each asset, which we will consider as we evaluate the migration of different asset classes to V3.
By taking a use-case-first approach and assessing each asset class’s specific risks and requirements, we aim to promote the efficient and successful migration of liquidity from V2 to V3.
Let’s consider two assets, A and B, identical in most aspects except for one key difference. Asset A can be listed with a higher Loan To Value (LTV) ratio on Aave V2 than it currently is, while all other settings remain the same.
In contrast, Asset B has become considerably more volatile and less liquid, necessitating a lower LTV ratio and a strict supply cap on Aave V2, while all other settings remain the same. Taking a case-by-case approach, we can tailor the risk management strategies for each asset, optimizing the migration of liquidity from V2 to V3. The transition may occur naturally for Asset A, as suppliers seek higher leverage for their collateral and borrowers find better terms on V3. However, Asset B may require a more targeted approach, including a detailed analysis of the associated risks and a strategic plan for risk parameter settings on both V2 and V3 deployments, to encourage a successful and efficient migration of liquidity.
Existing Positions
Position Structure and Cross-collateral considerations, i.e., supplied and borrowed assets and overall position leverage for each asset.
To facilitate the migration of positions from V2 to V3, it is essential to ensure that the majority of the collateral assets provided together can be accommodated in V3, along with sufficient liquidity of assets. This requires carefully evaluating the collateral basket’s composition and liquidity, including any unique characteristics or risks associated with the assets. This approach will help promote the smooth and efficient migration of positions from V2 to V3, allowing suppliers and borrowers to access better terms and benefits on V3 while minimizing potential disruptions.
Goals before timeline
While we recognize the importance of a complete and swift migration, our primary goal is to perform a successful liquidity migration, prioritizing goals ahead of timelines. The process of migrating liquidity from V2 to V3 requires careful planning, evaluation, and execution, and we believe it is essential to take the necessary steps to ensure that the migration is completed successfully. We understand that external factors, such as adapting protocols built on top of Aave V2 (index, morpho) and the perceived trustworthiness of Aave V3, can also impact migration timelines. Therefore, we must consider these factors while developing our migration plan to ensure that the migration process is not rushed and all necessary measures are taken to promote a successful migration. While we will push to perform the migration as quickly as possible, our focus is on promoting a smooth and efficient migration process that prioritizes the interests of the Aave community and risk managers.
Iterative process
We believe that each step in the migration process should involve a careful analysis of available data and a thorough evaluation of alternatives to ensure that the most effective measures are taken to promote liquidity migration. It is equally important to measure the impact of these actions once they have been taken. By tracking the transition of liquidity following each action, we can quantify the effectiveness of each measure in each case and make informed decisions to improve our approach accordingly. Therefore, we will continue using data-driven insights to refine our migration plan and ensure that we maximize our efforts to promote a successful migration from V2 to V3.
Additional considerations
Protocol Integrations
It is important to consider the impact of protocol integrations and proprietary strategies built on top of Aave V2 when planning the migration to Aave V3. Therefore, when migrating, we must work closely with integrated protocols and consider their needs and timelines. This will ensure the migration is as smooth as possible for all parties involved, promoting a successful transition to Aave V3.
E-Mode
E-Mode requires specific attention, especially in light of the recent depeg events. As outlined in Chaos Labs’ preliminary evaluation, we believe measures should be taken to address specifically these events systematically. Moreover, we believe that the LT of stablecoin E-Mode should be re-evaluated and configured at lower levels than other V3 deployments given:
- The value of E-Mode can come from listing multiple stablecoins and needs to account for all pairwise correlations
- Decreasing LT will come at the cost of forcing liquidations while increasing LT is free
- Since there is no E-Mode on V2, it is not a hurdle for the migration and, therefore, not a top consideration for migration
stkAAVE Incentives
As a general approach, incentives create initial traction but are not a sustainable measure, as mentioned by @MarcZeller. As mentioned, levers should be considered case-by-case, but we do not think they are useful as a general approach.