ARC: Add OP as Collateral to AAVE v3

Governance New Asset
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ARC: Add OP as Collateral to AAVE v3

Summary

The proposal seeks to onboard the OP token as a collateral asset in Aave V3 on Optimism. The Optimism Foundation could also seed incentives while the initial liquidity of the pool is bootstrapped.

References

  1. Project - https://www.optimism.io/
  2. Documentation Portal - https://community.optimism.io/
  3. Optimism Codebase - https://github.com/ethereum-optimism/optimism
  4. Address - Contract Address 0x4200000000000000000000000000000000000042 | Optimism
  5. Chainlink Oracle - Contract Address 0x0D276FC14719f9292D5C1eA2198673d1f4269246 | Optimism
  6. Communities
    1. Discord | 45.2k Members - https://discord-gateway.optimism.io/
    2. Twitter | 222.8K Followers - https://twitter.com/OptimismFND
    3. Mirror - https://optimism.mirror.xyz/
    4. Twitch - https://www.twitch.tv/optimismpbc

Summary

Initially launched at the end of 2021, Optimism is an EVM equivalent L2 scaling solution. Optimism currently supports 100+ dapps and over $500m in on-chain value. Optimism drastically improves Ethereum’s scalability while retaining its security through rollup technology - having already saved its users over $1B in gas fees.

The OP token is a governance token for the Optimism Collective. OP holders are currently able to vote on various decisions impacting the Collective, including the grants, protocol upgrades, inflation adjustments, and other fundamental changes. The Collective is committed to an iterative governance system that will evolve dynamically over time.

Optimism hopes to use the launch of this token to establish a deeper partnership between the Optimism and Aave communities. This proposal would enable OP as collateral on AAVE V3 on Optimism.

Motivation

With the recent release of the OP token, we want to bolster initial growth for Aave V3 on Optimism. This will benefit the Aave community by creating a vibrant ecosystem around Aave V3, while being a strong first use case for OP.

Aave would be one of the first platforms to support OP as collateral. The OP token is one of the first and leading rollup technology ecosystem tokens, so the Aave community would be supporting the scaling of Ethereum and onboard the cohort of users coming with it. L2s being the home for AAVE v3 could also gain a lot from this synergy.

Overall, the use cases will create the opportunity to continue growing liquidity and usage of the Aave v3 pools on Optimism.

Specifications

The Optimism Foundation is submitting this ARC. The Foundation is a Cayman Islands foundation company. It serves as a steward for the healthy, sustainable development of the Optimism ecosystem.

As noted above, the OP token is a governance token for the Optimism Collective. At genesis there was an initial total supply of 4,294,967,296 OP tokens. The total token supply is set to inflate at a rate of 2% per year, unless changed through governance.

Since Aave v3 pools were recently deployed on Optimism, the use of OP as a collateral asset is the next logical step. We expect it would be the ideal home for OP pools on Aave, and for it to drive large amounts of volume to these pools. A strong bond between Optimism and Aave is a benefit to both communities. To fully realize this integration, OP would need to be added as collateral.

Risk Analysis

Proposed Risk Parameters
LTV: 30%
Liquidation Threshold: 50%
Liquidation Bonus: 12%
Reserve Factor: 30%
Add Supply Cap: 1M

Risk Analysis
Risk Analysis2214Ă—302 117 KB

A non-image version of this table can be found here.

*The above scores are based on our understanding of the Aave risk rubric today (and are subject to change as the Optimism network evolves).

Smart Contract Risk

The token is a standard ERC20 + ERC20Votes implementation from OpenZeppelin with no custom code. The OP token has had an average of 53,337 daily transactions and a total of ~2.24M transactions to date. There is a large distribution of the token with ~88k holders.

Counterparty Risk

For the initial airdrop, 5% of the initial OP supply was widely distributed to over 250,000 eligible addresses. 14% of the supply is reserved for future airdrops and 20% is reserved for RGPG where public goods will be retroactively receiving tokens. The OP token and bicameral governance system seeks to facilitate security and decentralization.

Market Risk

OP is one of the leading L2’s and ecosystem projects. Token is traded across top-exchanges with large market caps and 24Hr volumes.

7 Likes
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Disclosure: We are also delegates in Optimism.

This is a big could:

With Governance Fund: Phase 1 nearing completion and exhausting the available funds, the opportunity for bootstrapping becomes more difficult. I would caution support based on this wording.

@ben-chain what is your relationship with the OP network?

Would be curious to better understand your motivations and comments.

This being said - Optimism is a growing, mature network with a clear emphasis on the end user. Furthermore, there is increasing liquidity with the promise of future airdrops.

If approved in a risk review, we would be happy to support it.

1 Like
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With Governance Fund: Phase 1 nearing completion and exhausting the available funds, the opportunity for bootstrapping becomes more difficult.

So far, I believe less than 20% of the governance fund has been committed. Additionally, the Optimism Foundation has a partner fund which could potentially be used for the purposes of bootstrapping. I think the risk that funds are exhausted is minimal.

@ben-chain what is your relationship with the OP network?

I’m a cofounder of Optimism and a director at the Optimism Foundation! :slight_smile:

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Ah, thanks for the clarification.

Was unaware that this little was committed - supportive :slightly_smiling_face:

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We support listing OP tokens as collateral assets in Aave V3 on Optimism. The future of scaling Ethereum will inevitably rely on rollup technology. Optimism is the leading L2 scaling solution with over $500m in TVL, and it has proven itself by saving over $1B in gas fees.

Allowing the governance token, OP, to be a collateral asset will increase the synergy between the Aave Protocol and Optimism ecosystem. Aave will be the first money market to increase the utility of OP tokens while growing its ecosystem on Optimism, as L2s are the main layer for V3. With more users onboard Optimism, having Aave as the main OP pool will benefit both communities.

With LTV at 30% and liquidation threshold at 50%, it is a reasonable starting parameter for OP as a volatile asset. The starting supply cap at 1M (around $1-1.5m in value if 1OP trade at 1-1.5$) is considered safe. We are looking forward to seeing the synergy between the two ecosystems develop, this proposal will benefit and strengthen directly to the two parties.

1 Like
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Revisiting this topic on behalf of Aave Grants DAO.

After receiving OP via the Phase 1 of the Governance Fund, Voting Cycle 1 - we would welcome the support of OP as collateral on Aave.

This gives teams (and users) like ourselves the unique opportunity to deposit into V3 and earn yield.

I would note Aave V3 has been a significant source of volume for Optimism-deployed dApps.

You can check out it’s comperative net flow of funds here:

Screen Shot 2022-08-08 at 10.02.33 AM

See his tweet and different time periods here.

We hope to continue this growing relationship between Optimims and Aave.

3 Likes
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Technical Parameters Update

Here is a more comprehensive list of the proposed technical parameters. Parameters are updated based on new market data.

  • Loan-to-value: 50.00%
  • Liquidation threshold: 65.00%
  • Liquidation bonus: 10.00%
  • Price feed: OP/USD | Chainlink
  • A/S/V tokens (aToken/Variable/Stable): Standard implementation
  • Interest rate strategy: N/A
  • Borrowing enabled: No
  • Stable borrowing Enabled: No
  • Reserve Factor: 20.00%
  • Liquidation Protocol Fee:
  • Debt Ceiling: None
  • Borrowable in Isolation: No
  • Supply Cap: 40M
  • Borrow Cap: N/A
  • eMode (efficiency mode): No
  • Unbacked Mint Cap: 0
  • Siloed Borrowing: N/A
2 Likes
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Thanks, @ben-chain. Gauntlet is analyzing from a market risk perspective and will return to the community.

2 Likes
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We noticed that an on-chain proposal has been published without analysis from Gauntlet on the risk parameters.

Gauntlet will be voting NO on this proposal, as it does not follow community best practices and sets a poor precedent for the protocol in listing new assets.

  • There is no Snapshot vote from what I can tell.
  • This proposal was submitted without Gauntlet’s risk assessment on the market risk side.
  • Listing assets in the volatile market conditions we find ourselves in today is generally not the best practice.

Asset listings are a significant risk vector for the protocol. A major reason why we have recently seen attacks on other protocols is precisely because the assets on those protocols are susceptible to price manipulation (poor liquidity, risky parameterization, oracle configuration, etc.).

OP is highly respected within the industry, and we are excited to see robust assets being added to Aave V3. But as a DAO, we should follow best practices to ensure the sustainability of the protocol. Of course, these DAO best practices may not be obviously apparent to partners, so no fault to the original poster.

Gauntlet targets providing analysis on the market risk side within ~2 weeks.

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It appears that there was indeed a Snapshot vote, months ago. Apologies for missing that and thank you @sakulstra for bringing to our attention. We’d note though that the Snapshot vote does not reflect the updated risk parameters that were submitted in the AIP.

The below 2 points still stand, and we will still be voting No.

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As a delegate on OP, we support this proposal’s foundations.

However, we agree with the concerns raised by @Pauljlei on two aspects:

  1. Timing seems unfavorable

  2. Lack of audit of review by risk managers

(No review by BGD either - GitHub - bgd-labs/aave-proposals-reports)

While we believe there are synergies between the two communities, it is vital to instill a regular and consistent practice for asset listings going forward and create a precedent for outside teams.

We encourage the OP team to delay this on-chain vote and re-submit later.

2 Likes
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There are some aspects to clarify on this:

  • BGD has supported Optimism with the technical aspects of submitting the proposal, as with any other proposal pre-approved via Snapshot. In this case, our involvement has been bigger than other assets listings (similar to stMATIC), as this will be the first cross-chain proposal on what affects Aave v3 Optimism, and we needed to add the new example payload to https://github.com/bgd-labs/aave-v3-crosschain-listing-template
  • BGD proposal reports are submitted once proposals are live or during the new “pending” state pre-voting, lasting for 1 day. This is done this way because even if we usually support/review external teams proposing, we don’t really have any control during the creation process, so on-chain information is the truth. We are about to publish one of proposal 116, which took slightly more than others due to some infrastructural problems with Tenderly, a tool used by Aave Seatbelt.
    We have not noticed any technical problems with it.
4 Likes
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Thanks for the clarity here @bgdlabs - I will be more patient when looking for the review; it is helpful context to know when evaluating proposals as they are pending.

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For context, here is our report https://github.com/bgd-labs/aave-proposals-reports/blob/master/reports/116-op-listing-on-aave-v3-optimism.md

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This is Guangye from Blockchain at Michigan. While we are excited to see a quality asset being added to Aave V3, we agree it’s important for the community to follow best practices. We will abstain until Gauntlet completes its risk analysis, and vote when the proposal is re-submitted later.

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Gauntlet Market Risk Assessment

In general, per Gauntlet’s Asset Listing Framework, we recommend listing assets without enabling them as collateral in order to observe how usage evolves for supplies and borrows and to derisk any mechanism design issues that could pose an outsized risk to Aave. Once an asset has sufficient time in the market, it can be prudent to enable them as collateral, provided there is sufficient liquidity and community buy-in.

Our analysis considers data including the following to assess the risk factors when recommending parameters:

  • Market cap of the token
  • Total supply
  • Largest liquidity sources (exchanges including CEX and DEX)
  • Volatility (30 day, 90 day, 1 year)
  • Average daily trading volume on CEX and DEX
  • Other DEX metrics

Optimism’s market cap of $228M and 30-day-average daily volume across multiple exchanges exhibits signals of ample liquidity and market interest for the asset. The asset’s level of liquidity in the market reduces the risk of price manipulation attacks.

The volatility of Optimism is relatively high when compared to other assets listed on Optimism v3. OP’s higher levels of volatility should be incorporated when assessing initial parameters.

The largest liquidity sources for OP are Uniswap (DEX) and Binance (CEX).

Gauntlet has performed preliminary price slippage analysis on the OP/USDC swap on 1inch to assess potential slippage. 1inch can handle market orders to sell $2M in OP with less than 10% slippage.

Recommendation

We always recommend listing assets without enabling them as collateral but should the community wish to enable these assets as collateral, our risk analysis recommends more conservative parameters than currently proposed for OP. Below are the recommend changes:

  • Lower LTV and Liquidation Threshold to 30% and 40%, respectively. As stated in our asset recommendation guidelines, it is prudent to list assets with conservative parameters with the goal of giving enough time to the asset at a low collateralization ratio to provide clarity that mechanisms are working as intended. The parameters can be updated to the current recommendations as early as 2 weeks after the initial listing, depending on how usage and market conditions evolve.
  • The current supply cap recommendation at 40M OP represents 19% of OP’s circulating asset supply. Allowing a high supply on Aave, relative to the circulating supply of the asset, can present several market risks, including liquidation cascades. Gauntlet recommends lowering the supply cap to 20M in order for collateral risk exposure to be less than 10% of the circulating supply. The supply cap may be adjusted higher if market usage deems it necessary.
  • Gauntlet recommends listing the asset in isolation mode with a debt ceiling of $2M. Listing the asset within isolation mode will allow the community to evaluate market liquidity and usage without exposing the overall protocol to outsized risk.

3 Likes