Thanks, @primoz, for the proposal.
Gauntlet is supportive of pausing ETH borrowing, specifically, calling disableBorrowingOnReserve to disable ETH borrowing. However, it would be prudent to break up this proposal into separate parts and perform more analysis before increasing Aave’s ETH borrow APR at 100% utilization.
The efficacy of the interest rate change depends on the expected yield of fork farming (expected ETHW price / ETH price) and the duration of ETH borrowing (time between borrowing ETH and selling ETHW to USD on a centralized exchange). The effect of the PoW fork is similar to the effect of a positive Ampleforth rebase, where both create profit opportunities at a scheduled time. We conducted a similar analysis of the relationship between AMPL rebase and AMPL interest rate. Similar to the positive AMPL rebase, if ETHW retains non-negligible value, raising the interest rate cannot completely eliminate 100% pool utilization since the borrow duration can be short (within minutes), which suggests that while increasing the ETH interest rate can reduce the time of high utilization, it won’t completely solve the 100% ETH utilization issue. In addition, the OP mentioned that increasing the ETH interest rate will force deleverage stETH/ETH recursive positions and worsen the stETH / ETH price deviation. We’d add that there’s a non-zero risk of liquidation cascades from people having to deleverage under high ETH utilization, creating more market uncertainties.
The tradeoffs need to be carefully analyzed before increasing the max interest rate. We’d encourage the OP to provide more justification on the below with regards to the proposed interest rate curve changes:
- How much additional stETH sell pressure will this create due to stETH/ETH recursive position deleveraging? What are the projected stETH insolvencies caused by the stETH / ETH price deviation? At the time of writing, Aave astETH contract is the largest stETH holder and holds 21% of stETH. The ETH pool utilization is 63%.
- How many potential liquidation failures caused by high ETH pool utilization can this prevent? What are the projected insolvencies prevented by avoiding liquidation failures?
Understanding these tradeoffs is important to make an informed decision on the proposed interest rate curve changes. Gauntlet would suggest splitting this proposal into two proposals (disable ETH borrowing vs. interest rate curve changes) so the community can vote on these two changes independently.
Given the time sensitivity, it is better to start the governance process sooner rather than later. A Snapshot vote for disabling ETH borrow should be published tomorrow. In addition, given the complexities of on-chain governance, Gauntlet is also happy to support publishing the AIP for disabling ETH borrowing.
As for the interest rate changes, the OP can propose those changes if needed. We’d encourage more justification, as outlined above, before doing so, given the added risks of changing the interest rate curve.