Thanks very much, @MarcZeller and the ACI, for consolidating the different threads and putting this into a format where the community can compare the two proposals.
Below, we wanted to summarize and provide transparency on the differences between the two proposals and methodologies, as well as outline some tradeoffs.
- LTV/LT setting
- WETH, WBTC: Our LTV/LT methodology draws from simulation results for V2 ETH and V3 AVAX, and we emphasize the use of caps to initialize a more guarded launch. As we understand it, Chaos’s methodology for LTV/LT relies on other V3 deployments agnostic to different chains.
- Stablecoins - Chaos’s recommendations for LT/LTV are derived from a weighted average of the debt against them (when those volatile assets are used as collateral). The idea, as we understand it, is to reflect the volatility of the debt.
- From our research, this should not be an apples-to-apples comparison because the primary market risks of stablecoin collateral are the upwards price movement of non-stablecoin debt. Under historical usage, the majority of protocol usage is WETH collateral and stablecoin debt. Therefore the LT and LTV of WETH are more heavily weighted towards the risks associated with the volatility of downward price movements, not its upwards price potential. The distribution of positive price returns and negative price returns is not symmetric.
- Ultimately, this methodology can have sampling bias since we do not know the true distribution of debt that stablecoins support. This methodology takes a snapshot of the debt against the stables at this point in time, and ignores the natural variance in the debt that these stables support (the composition of the volatile assets that are borrowed against the stablecoins change over time).
- Number of assets and isolation mode
- Gauntlet’s recommendations provide more assets upon initial launch. This reduces the governance burden of adding additional assets. Isolation mode assets are also included, which again reduces the governance burden of re-identifying isolation mode assets in the future, which can slow down the V2→V3 migration. With caps in place (and isolation mode as needed), this mitigates risk while allowing Aave V3 ETH to immediately have a more diverse set of assets.
- e-mode recommendations
- We do not recommend the 1% liquidation bonus for wETH/wstETH. A high liquidation bonus can be risky because it pushes accounts closer to insolvency, but a low liquidation bonus is also risky because it needs to provide enough incentive to liquidators to close risky positions. Given 1) the MEV space is highly competitive, 2) liquidators need to take into account gas costs to guarantee prices, front running when they acquire the debt side to repay positions, 3) flashloan and other fees, the 1% incentive can be dangerously low.
To clarify, Gauntlet’s recommendations take into account both current market conditions as well as stressed market periods (via simulation).
Overall Tradeoffs
- Chaos’s proposed LTs are generally lower than Gauntlet’s. As part of Chaos’s proposed plans to encourage V2-V3 migration, a potential path is to lower LTs across the board on V2. While certainly reasonable, this strategy requires many things to work in order to be successful
- Having lower LTV and LT on V3 will reduce the capital efficiency of V3 relative to V2, which is a disincentive for users to migrate to V3. Potential solutions are lowering V2 LTs, and additional incentives on V3. Reducing Aave V2 LTs may result in just losing TVL in general instead of promoting migration.
- Of course, the community may elect to embark on these strategies, but it is valuable to acknowledge their complexity and ambiguity.
- Gauntlet’s approach is different in that we rely more heavily on supply/borrow caps for a conservative launch instead of relying on lower LTs. This approach avoids the problems (disincentives and complexity) outlined above. From a methodology perspective, LTV and LT values for V2 and V3 should be similar, as market risks in both deployments are driven primarily by the liquidity of supported assets.
We hope that this helps provide clarity on the tradeoffs for the community. We couldn’t be more excited about the launch of Aave V3 on Ethereum.