# \[ARC\] Aave Ethereum V3 market initial onboarded assets

**URL:** https://governance.aave.com/t/arc-aave-ethereum-v3-market-initial-onboarded-assets/11318
**Category:** Governance
**Created:** [January 10, 2023, 11:02am UTC](https://governance.aave.com/t/arc-aave-ethereum-v3-market-initial-onboarded-assets/11318 "2023-01-10T11:02:37Z")
**Posts on this page:** 1
**Showing post:** 4

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### Author: ![ChaosLabs](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/chaoslabs/32/6850_2.png) [@ChaosLabs](https://governance.aave.com/u/ChaosLabs)
#### Post date: [January 11, 2023, 6:48pm UTC](https://governance.aave.com/t/arc-aave-ethereum-v3-market-initial-onboarded-assets/11318/4 "2023-01-11T18:48:36Z")

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We would like to clarify a few of the points made in the comment by @pauliej

> [@Pauljlei](#):
>
> - 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.

Our recommended parameters for the launch are indeed conservative. The V2 LT and LTV configurations (and the basis for the Gauntlet V3 proposal) are generally set high and do not reflect the current market conditions, as proven in the recent CRV attack. Migration to V3 is our highest priority, as stated with our recent V2 coverage extension AIP. However, we don’t believe that the path towards that is setting aggressive risk parameters in V3 to optimize for capital efficiency. Currently, Aave has risk debt, as parameters in V2 were not updated as market conditions deteriorated. It will take a few months to reduce the LTs in V2 responsibly and incentivize a migration to V3. We urge the community not to launch V3 on Ethereum with risk debt from day zero and take on unnecessary risk exposure.

**We can always be more aggressive with these parameters if market conditions improve. Scaling them back is a much larger challenge and can be quantified in months of work and prolonged risk exposure, as seen in V2.**

> [@Pauljlei](#):
>
> 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.

We’ve provided an analysis (which can be found at the bottom of our original [post](https://governance.aave.com/t/chaos-labs-aave-v3-ethereum-initial-parameters/11159)) to support the recommended configurations of LT, LTV, and LP for the e-mode category, taking into account observed stETH deviations. Given these parameters, alongside the recommended supply and borrow caps, we feel comfortable with the prospect of profitable liquidations.

As we’ve said in previous posts - we are open to hearing opposing recommendations and considerations. However, lacking data to support claims like the ones above leads to “hand-wavy” conversations that are challenging to manage.

> [@Pauljlei](#):
>
> 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](https://gauntlet.network/reports/aave), 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).

We know that the distribution of positive and negative price returns is not symmetric. However, as the volatility of upward price movement is less severe than that of downward price movement, using this heuristic leads to more conservative LT and LTV recommendations as intended.

As we wrote in our original post, we have devised this interim methodology for the initial launch risk parameters. Under current conditions, our risk-reward tradeoff leans heavily toward risk aversion; therefore, our primary motivation with the interim methodology was to provide a risk-off strategy for the community to opine on. Optimizing for risk-averse parameters while producing recommendations promptly has intentionally yielded less capital-efficient results. Once the simulation framework is complete and published for review, we will iterate on the recommendations to produce more capital-efficient risk parameter recommendations while keeping protocol risk at acceptable levels.

> [@Pauljlei](#):
>
> 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).

Our analysis has taken into consideration recent historical data, not just a single snapshot. Indeed, it is not guaranteed to remain so, but this is true for any protocol measure. Risk management and parameter recommendations are ongoing processes, and parameters such as these are monitored over time and modified when needed.

> [@Pauljlei](#):
>
> 1. **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.

Our recommendation is to have a 2-phased approach regarding the assets initially listed. It’s important to emphasize - per our understanding with core contributors - GHO is just a normal V3 asset. It doesn’t benefit from any extra feature, such as only being mintable by some assets or debt ceilings. The only way to restrict collaterals would be with isolation mode. Therefore, the limited assets in our proposal are by design. We want to support a safeguarded GHO launch, ensure high-quality collateral for GHO minting, and allow more time for a community discussion regarding the long-tail assets to be listed, given considerations ([GHO launch](https://governance.aave.com/t/arc-aave-ethereum-v3-market-initial-onboarded-assets/11318/3), [economic viability](https://governance.aave.com/t/arc-aave-v3-ethereum-deployment-assets-and-configurations/10238/28)) that were not taken into account in the original Snapshot.

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_[View the full topic](https://governance.aave.com/t/arc-aave-ethereum-v3-market-initial-onboarded-assets/11318)._