[ARC] Chaos Labs - Aave v2 Coverage

Summary

Chaos Labs proposes to expand the scope of its engagement with Aave to include proactive risk analysis and management of the v2 markets while encouraging and supporting a safe migration to the upcoming Ethereum v3 deployment.

The current engagement is focused on providing risk analyses and parameter recommendations across only v3 markets (Discussion link). With the recent volatility in the markets and attempted exploit through the CRV pool, our resources have shifted to supporting Aave v2 on Ethereum, as well, to ensure protocol stability and security.

We wanted to put this a community vote and formalize coverage and expectations around Chaos’ work on this instance and support during the launch and transition towards v3 on relevant protocols.

Background

Chaos Labs was approved as a risk partner for Aave v3 earlier last month and have begun work to launch the Community Parameter Recommendations in the coming weeks covering all relevant v3 markets across LTV, Liquidation Threshold, Liquidation Bonus, and Supply/Borrow Caps with other metrics coming shortly thereafter.

As liquidity in DeFi has dried up and volatility in non-pegged assets has increased, the risk situation for Aave v2 has become a greater concern to the community, with more surface area to be covered. It was not our intention to cover v2 during this engagement, as we were heads down and focused on v3. As the market volatility picked up, Chaos was asked (both publicly and privately) for our analysis of the state of the protocol to support and help minimize the risk of additional bad debt accrued to the protocol. Through the forum discussions around the appropriate risk response to the existing market factors, we aligned with the community that not all markets needed to be frozen, and there was a path forward with mitigated parameters, which we stepped in to propose in order to allow the community to have a voice both in the forums and via governance votes. All have passed with a significant show of support.

We are still iterating and publishing the amended parameters for v2 in line with those early proposals and have begun discussions analyzing the most appropriate path to transition usage to v3.

Through our first month as a contributor, we have coordinated with other DAO contributors to submit several risk proposals, including:

Additionally, we have published research on a number of topics to help inform community discussion:

Aave v2 is the only instance of the protocol live on Ethereum mainnet today, while the development for v3 to launch is ongoing. Usage capabilities of Aave v2 have been curtailed significantly, first by freezing several assets and subsequently unfreezing a portion of them to allow for supplying of “risky assets” and enabling borrows for well-structured “pegged assets.”

The transition to Aave v3 on mainnet will not be entirely seamless and will require the support of all contributors and community members to ensure it goes as smoothly as possible.

Proposal

Scope

Based on the work done to date in a short time frame and the amount of work ahead to transition from v2 to v3 on Ethereum, Chaos Labs is proposing to extend the scope of the original engagement to support parameter optimization on v2 as well as conduct relevant risk analyses during the transition planning.

Our priority with this added scope would be to methodically update parameters, protect existing user funds, and mitigate new potential risk factors on v2 while ensuring the capital efficiency of v3 is a more attractive option for new users.

This includes topics and considerations such as:

  • Methodically amending asset parameters to incentivize new users to open accounts on v3
  • Initiating coordination with third-party protocols building on top of v2 to assist in transition planning, communications, and timing
  • Helping analyze incentive (both treasury- and parameter-managed) schemes to incite account transitions
  • Continued analysis of the impact of market events and risk scenarios for the DAO

This work will be in conjunction with our existing v3 responsibilities and should not materially impact timelines for delivery during the coming months.

Duration: We propose this engagement to align with the 6-month anniversary of our original engagement, thus covering the remaining 5-month period. The intent is to bridge the transition from v2 to v3 during this period with a finite end date and not continue on indefinitely. If there is still material TVL on v2 at the end of this period, we will discuss the appropriate next steps and maintenance/monitoring expectations with the community.

Compensation: $250k streamed linearly over the 5-month period (equating to $50k per month).

  • 30% ($75k) payable in AAVE tokens
  • 70% ($175k) in stablecoins

Next steps

We will continue our work on Aave v3 tooling as stated in prior posts and hope to discuss this proposed expansion with the community before moving forward with a Snapshot vote next week.

15 Likes

Getting some insights from @bgdlabs would be amazing

Given recent and ongoing market events and events within Aave (CRV attack and the continuing discussions around Gauntlet’s renewal), Chaos have been very helpful in conducting risk-mitigation analysis on v2 which falls outside of their scope. The scope proposed here seems appropriate to meet Aave’s needs and is necessary to formalise Chaos’ support over the next few months.

Having discussed this proposal with Chaos, they have confirmed that their primary goal is to help migrate usage and volume over to v3 as quickly and efficiently as possible. They have intentionally proposed a shorter timeframe for this engagement since this is a necessary focus rather than an ongoing engagement, which is sensible. Chaos have also confirmed that they will be looking at both incentivising the move from v2 to v3 and actively managing the risk on v2 markets. The fee of $50k per month for 5 months also seems fair and in line with the proposed scope.

Therefore, we are in favour of this proposal by Chaos and would welcome feedback from other Aave participants as well to see if our analysis has missed any critical points.

6 Likes

Link to Snapshot vote below.
Voting period is from December 21st, 4 PM EST to December 24th, 4 PM EST.

https://snapshot.org/#/aave.eth/proposal/0xd4df8cd3ef68f787d08cd0f8c529471ed48d70ebc15a562a39dbc0196a9f8e47

During this initial engagement period, Chaos Labs has shown exactly what I think was necessary for an entity with not so much history within the Aave community: high involvement and results.

Additionally, through my professional coordination with Chaos Labs (via BGD), I can certify they have been doing a really good effort in all the different risk fields of the community, including adapting fast and with criteria to unforeseen events.

From my point of view, it is fully legitimate to compensate the work done and to be done. Support.

6 Likes

Chaos has been shrewd over the past months to act with speed and grit.

Working with Ben, Ori, and others - it is clear their passion for Aave and investment in the DAO.

As the exact date of v3 deployment is still unknown, it seems fair to compensate them for their work and continued coverage of the v2 markets - where many users still exist.

Eventually, we hope to see a transition to v3 - in the meantime, let’s keep it safe.

3 Likes

Chaos Labs has solidified itself as a valuable part of the Aave Community for that reason, we gladly support this proposal, considering the scope, proposed compensation and timeline for this engagement, we believe that managing risk on V2 while incentivizing a move to V3 is in the best interest of the Aave Protocol and its users.

2 Likes

Following the successful Snapshot vote, we have published the AIP that will be live in 24h:

https://app.aave.com/governance/proposal/?proposalId=139

We appreciate the community’s vote of confidence and support and are excited to expand our engagement to the v2 markets.

the ACI voted in support of Chaos Labs in both snapshot & AIPs vote and is looking forward working with chaos Labs.

1 Like