ARC: Gauntlet Asset Listing Framework (Market Risk) and Community Consensus Check

Simple Summary

To guide best practices to the Community, we provide this standard framework for assessing market risk when listing new assets as well as enabling those assets as collateral. Related to this asset listing framework, a Snapshot vote will be published to establish community consensus on whether:

  1. New assets are not required to be listed with an initial LTV of 0%, or
  2. New assets are required to be listed with an initial LTV of 0%.

Motivation

Since Gauntlet began its partnership with the Aave protocol, we have received requests from the Community to analyze asset listings. Community members, developers, and other stakeholders often asked us questions like, “how much liquidity should this asset have before being listed? What should the asset’s initial parameters be? How do we protect the protocol from insolvency?”

Gauntlet’s framework focuses specifically on market risk and how Gauntlet will support the asset listing process in Aave. Our framework can be found here. This will work in conjunction with Aave’s existing asset listing framework.

Listing assets is essential to the growth of the protocol. As new assets in DeFi proliferate and older assets fall out of favor, Aave must list and delist assets to maintain its usefulness as a protocol. Gauntlet will conduct these risk assessments prior to new assets being listed, given 2 weeks of notice and strong community buy-in.

Notably, we recommend that LTV and Liquidation Threshold be set to 0% on the initial listing. In other words, assets will not be allowed to be used as collateral upon their initial listing.

Historically, the community has listed assets with non-zero LTV and Liquidation Threshold. Because there are risks in doing so, we will publish a Snapshot vote to help the community align on best practices moving forward.

Specification

Community input is valuable because requiring that assets are listed with an initial LTV of 0% imposes important trade-offs:

  1. Not requiring assets to be listed with an initial LTV of 0% can potentially allow the asset to have more utility (depending on the asset) from the onset of listing. Thus, the protocol may be earning revenue at the onset of the listing (driven by increased borrows). However, when assets are enabled as collateral from the initial listing, the protocol immediately faces the technical and market risks inherent in adding another risk vector to the protocol. The protocol is only as strong as its weakest link.
  2. Requiring assets to be listed with an initial LTV of 0% can protect the protocol from unforeseen mechanism, smart contract, and other technical risks. In addition, setting an initial LTV of 0% allows the protocol to observe how supply and borrow usage as well as liquidity conditions evolve following the asset listing. This data enables more robust risk analysis and fine-tuning of LTV and Liquidation Threshold parameters following the initial asset listing. The tradeoff is that until an asset is enabled as collateral, usage may be limited (depending on the asset), and thus, the protocol faces an opportunity cost of revenue. We view this as a minuscule opportunity cost (e.g., a few weeks of revenue attributable to the asset) relative to the risks. Assets can be turned on as collateral, but being turned off as collateral is a more difficult process with increased user friction.

Option 1 above should not be interpreted as suggesting that all assets should be enabled as collateral. It simply allows for the possibility that assets can be listed with an initial non-zero LTV should the community deem the asset a collateral asset.

Should the community favor Option 2, assets should be listed with an initial LTV of 0%, and a separate proposal must be proposed by the community at some point after the initial listing to enable the asset as collateral. At that point in time, given strong community buy-in, Gauntlet will conduct market risk analysis to recommend LTV and Liquidation Threshold parameters.

Next Steps

  • A Snapshot vote will be published on 8/16 with the options being the following:

    1. Not all assets are required to be listed with an initial LTV of 0%.
    2. All assets are required to be listed with an initial LTV of 0%. After 2-3 weeks of operation as a non-collateral asset, the community can propose turning it on as collateral. At that point, Gauntlet will make parameter recommendations as per our Notion document below.

Quick Links

Gauntlet Asset Listing Framework for Market Risk

By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.

7 Likes

Thank you for this post. Clarity around community sentiment on how listing new assets is something we are very interested in as well.

We are in favor of option 2. As pointed out “Assets can be turned on as collateral, but being turned off as collateral is a more difficult process with increased user friction.” Better to be safe than sorry is our opinion and there aren’t any unlisted assets right now that we think will generate enough revenue for the protocol to skip this initial 0% LTV “trial” period.

3 Likes

What would the use case be for depositing tokens with a 0% LTV? Most volatile tokens have zero or negligible supply APY’s. Would it not be more useful and safer to set a small borrow cap initially to manage risk while gathering data on user behavior?

3 Likes

Thanks for the feedback. A few notes:

  • It may be the case that there is limited utility for the asset until it is enabled as collateral. The purpose of starting out with 0% LTV is more directed towards protecting the protocol from unforeseen mechanism, smart contract, and other technical risks.
  • On Aave V2, allowing or disallowing borrows is a binary value. Supply/Borrow caps currently do not exist (until V3).
1 Like

I don’t want to harp on this, but v3 offers a range of risk mitigants that could keep the protocol safe. Obviously this is the primary concern, but risk is a spectrum and there is a point beyond which the marginal change in safety is less than the marginal change in utility. I think there can be assets added that would be adequately safe to borrow against in isolation mode with a low cap initially for example.

For Aave v2, defaulting to 0% makes sense to force active motivation why an asset should become collateral. Perhaps there could be an option to vote for 0% CF in v2 and the potential to conservatively act as collateral in isolation mode?

This would reduce governance a bit by not requiring two separate proposals to get to the point of isolated pools and be a step towards attracting longer tail assets.

1 Like

Snapshot vote is below, and voting begins in 24 hours:

https://snapshot.org/#/aave.eth/proposal/0x1e22490f0b28c3c262341ee2c13c08236bddb2936d2893c203a16e3f850963ce

I don’t agree to set this as a hard requirement on listings.

As commented previously, with certain assets there is not really any reason to list them on Aave without enabling them as collateral. So going through the listing process for no utility as result doesn’t make much sense.
If this could be generalized, the correct approach should be to enforce that behavior on the smart contracts themselves, but it was not done because it doesn’t seem reasonable to generalize.

Initial proposals for listings should contain enough rationale in terms of risk on why an asset is suitable for collateral or not since the start, with Gauntlet checking if that rationale is legit. Mandatorily moving this to post-listing steps will just increase the amounts of assets listed on Aave, without any assurance that they will have more real utility in the future.

Also, this will most probably cause people to support more frequent listings, as they will be seen as “riskless”. Which in turn will create more engineering and proposal-voting overhead.

3 Likes

I don’t agree with this approach. It overlooks the risk management tools of v3 which represent a viable alternative to reducing risk exposure.

Most types of collateral are used to borrow stablecoins and without the ability to borrow stablecoins, this significantly reduce the appeal of listing the asset. The proposal only mentions the LTV parameter, which means we are expecting borrowing demand from those shorting the newly listed asset to create utility. Any deposited governance token will likely loose its governance utility.

In the context of how this is written, this is not entirely true. Isolation mode, setBorrowCap enables the exposure to be minimised. There are alternative more means of containing risk which should be utilised as opposed to a blanket rule.

Can Gauntlet elaborate how a step change in utility can be quantitatively predicted ?

Can we confirm this only applies to the two of the twelve (Incl. RWA and Arc) active markets which are currently supported by Gauntlet. I don’t see why a LTV of 0% on Aave Arc Market is applicable if the same asset is listed on Aave v2 on Ethereum. This proposal, if applied to the majority of markets will lead to governance duplication. Once to list the asset and another to enable it as collateral a few weeks later. I don’t see the value add of this extra step when Gauntlet is only supporting 2/12 of the active markets.

2 Likes

Thanks, @eboado and @MatthewGraham. We agree that there may be limited utility for an asset if its LTV is 0%. The point of starting out with 0% is to observe whether the mechanisms are working properly before enabling the asset as collateral.

We’ll emphasize that the “rationale in terms of risk” is fully related to not just market risk but also smart contract and technical risks as well. Gauntlet can provide assessment of market risk, but not of smart contract/other technical risks. We are happy to move forward here if BGD / Aave Companies / other community contributors take ownership of assessing these risks. We’d appreciate your thoughts on who in the Aave community should assess these smart contract/technical risks.

This is an interesting point. The proposal overhead is already a rather high lift - we are certainly open to ideas of having a more streamlined governance process for listing new assets.

Instead of aggressively setting high LTV parameters from the start, it is generally more prudent to start conservatively with lower LTV parameters, observe how usage and liquidity conditions evolve, and then scale up LTV accordingly. Our simulation models ingest the data (liquidity, volatility, asset correlations, user positions, etc) to recommend risk parameter changes.

This process applies to Gauntlet’s supported markets, which are currently Aave V2 Ethereum and Aave Arc Fireblocks markets.

The technical mechanism should be (and are) tested pre-listing, with techniques like fork tests.

At the moment, Certora is assessing the ERC20 technical risk of the assets https://www.certora.com/erc20s/aave-listings/ and also BGD is reviewing both the asset, oracle, and general listing. This usually happens once the community shows a bit of support for the listing.

Fully agree with this. I think LTV 0% mandatory is too restrictive, but I’m completely in favor of starting low and progressively updating. This is also in line with the periodic adjustments of Gauntlet

1 Like

I choose option 1:New assets are not required to be listed with an initial LTV of 0%.

  1. When an asset passes the review and can be listed on AAVE, it means that this asset is reliable, or it should be a mistake of the review team.

  2. If a new asset is listed with an initial LTV of 0%, I don’t know what can be done with this asset with an initial LTV of 0%. How can we find the risk if we can not do anything with it?

  3. The industry is changing so fast , AAVE must keep up with changes in the industry.