[ARC] - Chaos Labs Supply and Borrow Cap Updates - Aave V3 - 2023.02.24

Risk
1

Simple Summary

A proposal to adjust:

  1. Twenty-five (25) total risk parameters, including Supply Cap and Borrow Cap, across thirteen (13) stablecoins on Aave V3 Polygon, Arbitrum, Avalanche, and Optimism assets.
  2. Four (4) supply caps across four (4) assets on Aave V3 Polygon and Avalanche

Motivation

The objective of this proposal is to recommend updated supply and borrow caps for:

  1. V3 stablecoins that have excessive supply caps set and/or have no set borrow cap.
    1. The caps are intended to allow for substantial growth compared to the current supply while not set too excessively.
    2. The recommendations for the supply caps are set to up to 40% of the circulating supply for most assets and no more than 60%. You can find the exact number for each asset in the tables below. Borrow caps are set to ~65% of the supply cap.
  2. V3 assets that have reached over 75% utilization of either cap.
    1. The recommendations provided in this proposal were derived using Chaos Labs’ Updated Supply and Borrow Cap Methodology. Below are the data and considerations for the assets and recommended caps for these assets:

There following assets are at >75%. However, we do not recommend increasing their caps at this time due to current liquidity levels:

  1. GHST (V3 Polygon)
  2. SUSHI (V3 Polygon)
  3. BAL (V3 Polygon)
  4. AAVE (V3 Arbitrum)

Polygon

We propose updating the supply caps for WETH and AAVE. The new proposed caps are set to allow growth on V3 and room for the migration of positions from V2. The image below shows the total value in borrows for the said assets.

WETH

Screen Shot 2023-02-24 at 12.19.35 PM
Screen Shot 2023-02-24 at 12.19.35 PM1684Ă—1462 235 KB

Given the calculation below, we recommend increasing the supply cap of WETH to 50,000, nearly doubling the current supply cap (rounded down from 53,800).

We do not recommend a change to the borrow cap at this time.

Current Supply Extreme Liquidation Amount Max Amount Liquidated R Recommended Supply Cap
WETH 22,310 $350,000 $8,500,000 2.00 50,000

AAVE

Screen Shot 2023-02-24 at 12.22.33 PM
Screen Shot 2023-02-24 at 12.22.33 PM1668Ă—834 74.6 KB

Given the calculation below, we recommend increasing the supply cap of AAVE to 70,000 nearly doubling the current supply cap (rounded down from 73,640).

Current Supply Extreme Liquidation Amount Max Amount Liquidated R Recommended Supply Cap
AAVE 34,360 $70,250 $280,000 2.00 70,000

Avalanche

We propose updating the supply caps for LINK and AAVE. The new proposed caps are set to allow growth on V3 and room for the migration of positions from V2. The image below shows the total value in borrows for the said assets.

AAVE

Screen Shot 2023-02-24 at 12.27.28 PM
Screen Shot 2023-02-24 at 12.27.28 PM1732Ă—858 76 KB

Given the calculation below, we recommend increasing the supply cap of AAVE to 5,800.

Current Supply Extreme Liquidation Amount Max Amount Liquidated R Recommended Supply Cap
AAVE 3,860 $11,100 $15,000 1.50 5,800

LINK

Screen Shot 2023-02-24 at 12.28.12 PM
Screen Shot 2023-02-24 at 12.28.12 PM1654Ă—1494 222 KB

Given the calculation below, we recommend increasing the supply cap of LINK to 440,000.

We do not recommend a change to the borrow cap at this time.

Current Supply Extreme Liquidation Amount Max Amount Liquidated R Recommended Supply Cap
LINK 294,910 $121,770 $166,000 1.50 440,000

Recommendations

Arbitrum

Updated Caps for Stables

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap Notes
DAI 3,530,000 2,000,000,000 50,000,000 1,940,000 N/A 30,000,000 38% of the circulating supply
EURS 36,590 N/A 60,000 24,242 N/A 45,000 60% of the circulating supply
USDC 34,700,000 2,000,000,000 150,000,000 17,410,000 N/A 100,000,000 16% of the circulating supply
USDT 3,720,000 2,000,000,000 50,000,000 3,060,000 N/A 35,000,000 20% of the circulating supply

Optimism

Updated Caps for Stables

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap Notes
DAI 2,620,000 2,000,000,000 25,000,000 1,210,000 N/A 16,000,000 35% of the circulating supply
sUSD 1,510,000 20,000,000 No Change 783,150 N/A 13,000,000 25% of the circulating supply
USDC 48,510,000 2,000,000,000 150,000,000 15,870,000 N/A 100,000,000 43% of the circulating supply
USDT 3,880,000 2,000,000,000 25,000,000 3,100,000 N/A 16,000,000 47% of the circulating supply

Avalanche

Updated Caps for Stables

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap Notes
DAI 12,260,000 2,000,000,000 30,000,000 6,480,000 N/A 20,000,000 52% of the circulating supply
FRAX 16,260 50,000,000 1,500,000 15,281 2,000,000 1,000,000 38% of the circulating supply
MAI 113,620 50,000,000 700,000 103,660 2,000,000 460,000 42% of the circulating supply
USDC 156,940,000 4,000,000,000 250,000,000 97,960,000 N/A 175,000,000 45% of the circulating supply
USDT 52,450,000 2,000,000,000 200,000,000 35,930,000 N/A 140,000,000 30% of the circulating supply

High Utilization

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap
AAVE 3,860 4,500 5,800 N/A N/A N/A
LINK 294,870 353,000 440,000 5,750 220,000 No Change

Polygon

High Utilization

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap
WETH 22,250 26,900 50,000 2,695 14,795 No Change
AAVE 34,300 36,820 70,000 N/A N/A N/A

Next Steps

We invite a community discussion around the proposed parameter updates and utilizing the Aave V3 Caps Framework, are targeting an AIP for Monday, February 27th.

5 Likes
2

Following the community poll on risk preference, Gauntlet is conducting updated analysis on borrow/supply caps. Gauntlet’s recommendations differ from Chaos’s numbers above, but to avoid community confusion, below are a few points:

  • Gauntlet’s recommendations on the stablecoins above differ from Chaos’s numbers. We will follow up with more fine-tuning of the caps, but we do not want to block on these stablecoin recs in the meantime.
  • For Polygon V3, Chaos’s recs for WETH and AAVE are riskier than Gauntlet’s Conservative recommendation but within Gauntlet’s Aggressive calculation. Please see here for Gauntlet’s methodology. Thus, our research shows that if the community has an aggressive (higher-risk) preference, then the community may wish to increase the caps on WETH and AAVE to allow more growth.

The table below shows Gauntlet’s Conservative and Aggressive supply cap calculations.

image

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4

Following the community vote on risk preferences regarding caps on Aave V3, we have updated our supply and borrow cap methodology to add a Supply Cap upper bound of 50% of the total circulating supply for all assets. This is done to protect from the concentration of on-chain liquidity on Aave.

To reduce governance overhead and not create additional proposals, we would like to add the following supply and borrow caps updates to this proposal.

Accepting these changes will lead to freezing supply for the following assets:

  • BTC.b, WBTC.e (V3 Avalanche)
  • AAVE , WBTC (V3 Optimism)
  • AAVE (V3 Arbitrum)
Network Asset Current Supply Current Supply Cap Total Circulating Supply Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
Avalanche BTC.b 3,950 5,800 6,984 3,500 3,190 1,900
Avalanche WBTC.e 1,340 5,233 2,770 1,400 No Cap 770
Avalanche WETH 22,960 113,000 75,570 37,500 62,150 20,500
Optimism AAVE 61,890 100,000 66,150 33,000 N/A N/A
Optimism LINK 93,050 258,000 317,900 159,000 141,900 87,500
Optimism WBTC 636 1,100 1,273 650 605 360
Arbitrum AAVE 1,910 2,500 3,660 1,850 N/A N/A

Next Steps

As this proposal will effectively freeze supply on several assets, we invite community feedback before posting an AIP. We are targeting an AIP in 48 hours, barring community objection.

1 Like
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It is nice to see Chaos updating their methodology to incorporate elements that have been included in Gauntlet’s borrow/supply cap methodology, such as 50% of circulating supply.

As mentioned above, Gauntlet has been working on updated borrow/supply cap recommendations. We posted them here.

Given that Chaos’s methodology now incorporates a cap of 50% of circulating supply, several of Chaos recs are similar to Gauntlet’s. However, there are important areas where our recommendations diverge (WBTC, AVAX, etc.).

As we mentioned, we are happy to collaborate with Chaos on this set of recommendations. We wish to incorporate our option so that the community may choose transparently. We can provide a summary of the key differences so that the community can have the clarity to make an informed decision.

As such, instead of going direct to AIP, it may be best to first do a Snapshot vote (swiftly, of course) to decide between the two options and then fast-follow with an AIP. We are also open to hearing other alternatives from Chaos or the community.

6

To reduce governance overhead and not delay the implementation of the changes (including the update for Arbitrum and Polygon) any further, we propose the following:

Optimism

As both proposals are very similar, we suggest going straight to AIP with a joint proposal, updating Chaos’ original recommendations while incorporating Gauntlet’s recommendations for LINK, WBTC, and AAVE.

  • LINK

    • Both proposals have almost the same Supply Cap. We recommend incorporating Gauntlets’ recommendations as their suggested Borrow cap is slightly more conservative while still allowing room for significant borrowing (<10% utilization)

  • WBTC

    • We recommend incorporating Gauntlets’ recommendations as their suggested Supply and Borrow caps are slightly more conservative while allowing room for significant borrowing (<10% utilization). Both proposals effectively freeze the supply.

  • AAVE - both proposals effectively freeze supply.

We will continue monitoring these markets and propose updated supply caps with changing market conditions.

Recommendations:

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap
DAI 2,620,000 2,000,000,000 25,000,000 1,210,000 N/A 16,000,000
sUSD 1,510,000 20,000,000 No Change 783,150 N/A 13,000,000
USDC 48,510,000 2,000,000,000 150,000,000 15,870,000 N/A 100,000,000
USDT 3,880,000 2,000,000,000 25,000,000 3,100,000 N/A 16,000,000
AAVE 61,890 100,000 45,000 N/A N/A N/A
LINK 93,050 258,000 160,000 10,661 141,900 84,000
WBTC 636 1,100 620 21 605 250

Avalanche

A deciding Snapshot vote with two options for the community to vote on.

  • Both options will have the same recommendations for stables (DAI, FRAX, MAI, USDC, and USDT), AAVE, and LINK - as proposed in the original post.

  • WETH - As the supply cap is almost identical, we recommend incorporating Chaos Labs’ borrow cap recommendation as it is more conservative while still allowing room for significant borrowing (~17% utilization).

  • WAVAX - incorporate Gauntlets’ recommendations.

  • Let the community decide between the following options for BTC.b and WBTC.e:

    • Aggressive - the higher supply and borrow cap between the two options.
    • Conservative - the lower supply and borrow cap between the two options.

  • It is important to note that for BTC.b, both proposals effectively freeze new supply.

Recommendations :

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap
DAI 12,260,000 2,000,000,000 30,000,000 6,480,000 N/A 20,000,000
FRAX 16,260 50,000,000 1,500,000 15,281 2,000,000 1,000,000
MAI 113,620 50,000,000 700,000 103,660 2,000,000 460,000
USDC 156,940,000 4,000,000,000 250,000,000 97,960,000 N/A 175,000,000
USDT 52,450,000 2,000,000,000 200,000,000 35,930,000 N/A 140,000,000
AAVE 3,860 4,500 5,800 N/A N/A N/A
LINK 294,870 353,000 440,000 5,750 220,000 No Change
WETH 22,960 113,000 38,000 3,438 62,150 20,500
WAVAX 2,890,000 13,100,000 3,800,000 1,040,000 No Cap 1,200,000

Option 1 - Aggressive

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap Notes
BTC.b 3,950 5,800 3,500 364 3,190 1,900 freezes supply
WBTC.e 1,340 5,233 2,000 223 No Cap 1,100

Option 2- Conservative

Asset Current Supply Current Supply Cap Recommended Supply Cap Current Borrow Current Borrow Cap Recommended Borrow Cap Notes
BTC.b 3,950 5,800 3,000 364 3,190 900 freezes supply
WBTC.e 1,340 5,233 1,400 223 No Cap 770
2 Likes
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Thanks, @ChaosLabs.

For Optimism recs: given that this updated proposal incorporates Gauntlet’s recommendations on LINK, WBTC, and AAVE as well as the other recommendations we posted here, this plan sounds good to us.

For Avalanche recs: given that this incorporates Gauntlet’s rec on WAVAX, and given that both the Aggressive and Conservative options have effectively the same impact (freeze supply), this plan sounds good to us.

2 Likes
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Thanks Gauntlet (@Pauljlei), for the collaboration on this proposal.

We have published the following Snapshot for the community to vote on the preferred set of updates for V3 Avalanche - conservative or aggressive as shown here.

Start Date: Thursday, Mar 2, 2023, 3:00 PM
End Date: Sunday, Mar 5, 2023, 3:00 PM

We will follow up soon with links for the AIP for the updates of Optimism, Arbitrum and Polygon.

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We have published AIP-170 for community members to vote on, starting in 24h.

Thank you in advance for your participation in the vote.

In addition, the Snapshot for supply and borrow caps updates on V3 Avalanche has ended with the community choosing the aggressive option. These changes will be implemented via the Aave Guardian process. Thank you to all who participated in the vote.