[ARC] Gauntlet Borrow/Supply Cap Updates for Aave V3 OP and Aave V3 AVAX (2023-01-27)

Risk General
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TLDR: Please see our Specification Summary below for a synopsis of recommended changes.

Motivation

Following the Snapshot vote, we are updating and providing more clarity on Gauntlet’s borrow and supply cap recommendations for Aave V3 markets on Avalanche and Optimism chains.

Our initial recommendation for the same markets can be found here and a brief description of the methodology used can be found here.

The above methodology has been fine-tuned based on the feedback we received from the community in our previous post.

More specifically:

  • For small or “non-strategic” assets, we set conservative borrow and supply caps.
  • For large or “strategic” assets, we set aggressive borrow and supply caps.
  • For assets listed on V2 Avalanche, we aim to accomodate the migration from V2 to V3. Generally, we considered it safer for the protocol to deviate from our initial recommendations to allow migration to V3 to continue rather than leave assets on Aave V2.
  • For liquid staked tokens (LSTs) that are easily redeemable (i.e., sAVAX), we readjusted borrow and supply caps upwards by considering liquidity of the underlying token.
  • For very aggressive supply cap increases for assets that were near the supply cap, we limit the change to 150% of increase relative to current supply cap. We may follow up with additional recommendations for further supply increases in the future.
  • For supply cap decreases where the recommended values are below current supply, we limit the change to a 75% decrease relative to current supply. We may follow up with additional recommendations for further supply cap decreases in the future.
  • Our approach is to update borrow cap and supply cap recommendations once borrows or supplies reach 75% of their respective caps or liquidity conditions change for each respective token.
  • Further, we provide bridge information for assets on V3 Avalanche and V3 Optimism. We hope this information around bridges provides greater transparency to the community for their decision-making.

Updated Parameter Recommendations

Bridged and liquid staking tokens

The majority of bridged tokens on the Avalanche chain used on Aave V3 (WETH.e, AAVE.e, LINK.e, WBTC.e, DAI.e, BTC.b) are issued by the Avalanche bridge and proof of reserves are provided on their website. FRAX is issued by frax.finance, MAI is issued by mai.finance, USDT is issued by Tether, and USDC is issued by Circle.

sAVAX is the only liquid staking token provided by Aave V3 on Avalanche, and the staking services are provided by BENQi.

For Optimism, bridging from Ethereum happens through the official bridge for all Aave V3 assets except for sUSD where the Synthetix bridge can be used. Bridging back to Ethereum through the native bridge introduces a 7-day delay, which can force users to use 3rd party bridges.

Chain Asset Issuing Entity Official Issuance/Bridging Estimated Days to Bridge in Estimated Days to Bridge out
Avalanche DAI.e Avalanche Avalanche Bridge | Core <1 <1
Avalanche FRAX Frax Finance https://app.frax.finance <1 <1
Avalanche MAI MAI Finance https://www.mai.finance/ <1 <1
Avalanche USDC Circle Circle | USDC Stablecoin, Payments & Treasury Infrastructure KYC restrictions/TradFi Speeds <1
Avalanche USDt Tether https://tether.to/en/ KYC restrictions/TradFi Speeds <1
Avalanche Aave.e Avalanche Avalanche Bridge | Core <1 <1
Avalanche BTC.b Avalanche Avalanche Bridge | Core <1 <1
Avalanche LINK.e Avalanche Avalanche Bridge | Core <1 <1
Avalanche sAVAX Avalanche Avalanche Bridge | Core <1 <1
Avalanche WBTC.e Avalanche Avalanche Bridge | Core <1 <1
Avalanche WETH.e Avalanche Avalanche Bridge | Core <1 <1
Optimism DAI Optimism Optimism Gateway <1 7
Optimism sUSD Synthetix.io Synthetix Staking <1 <1
Optimism USDC Optimism Optimism Gateway <1 7
Optimism USDT Optimism Optimism Gateway <1 7
Optimism AAVE Optimism Optimism Gateway <1 7
Optimism LINK Optimism Optimism Gateway <1 7
Optimism WBTC Optimism Optimism Gateway <1 7
Optimism ETH Optimism Optimism Gateway <1 7
Optimism WSTETH Optimism Optimism Gateway <1 7

Specification

We provide a tailored set of recommendations below, aiming to account for the community’s strategic preferences while limiting governance fatigue resulting from other ongoing parameter proposals. We hope that the below provides transparency into the risk analysis rationale.

As a result of our asset-by-asset analysis, we recommend proactively freezing new supply for several assets to mitigate outsized tail risk.

V3 AVAX:

  • Stablecoins: the majority of Gauntlet’s recommendations are more aggressive than other recommendations. As such, we will not move forward with our stablecoin recommendations.
  • AAVE.e: our analysis recommends an increase in the supply cap to allow for migration, but we will not move forward with this recommendation because there is an existing proposal to increase it (that is more conservative than our recommendation).
  • BTC.b: we recommend decreasing the cap to below the current supply, which would effectively freeze new supply of BTC.b. We also recommend lowering the borrow cap. BTC.b is an asset that can pose potential risk given the size of the Aave market relative to circulating supply (over 50%).
  • LINK: our analysis shows that the supply cap can be higher, but we will not move forward with this recommendation because ongoing proposals are increasing it. For the borrow cap - our analysis shows that the borrow cap can be higher, but because there is still room for borrow growth under the current cap, we will not move forward with this parameter change.
  • sAVAX: our conservative figure is lower than other ongoing recommendations. However, if the community has an Aggressive risk preference, the ongoing recommendations may be preferred. Thus, we will not move forward with our recommendation.
  • AVAX: we recommend decreasing the supply cap and implementing a borrow cap.
  • WBTC.e: we recommend decreasing the supply cap and implementing a borrow cap.
  • WETH.e: we recommend decreasing the supply cap and decreasing the borrow cap.

V3 Optimism

  • Stablecoins: the majority of Gauntlet’s recommendations are more aggressive than ongoing recommendations. As such, we will not move forward with our stablecoin recommendations.
  • AAVE: we recommend decreasing the cap to below the current supply, which would effectively freeze new supply of AAVE. AAVE is an asset that can pose potential risk given the size of the market relative to the circulating supply.
  • LINK: we recommend lowering the supply and borrow caps.
  • WBTC: current supply is greater than even our Aggressive recommendation (624). As such, we recommend lowering the supply cap, which would effectively freeze new supply of WBTC and also lower the borrow cap.
  • ETH: our recommendations are more aggressive than the current caps. Because the current caps still allow room for growth, we will not move forward with these recommendations.

Specification Summary

For better user experience, we round the recommendations to an easily interpretable number.

Asset parameter current parameter recommended parameter notes

V3 AVAX

Asset Parameter Current Parameter Recommended Parameter Notes
BTC.b Supply Cap 5,800 3,000 Effectively freeze supply
BTC.b Borrow Cap 3,190 900 —
AVAX Supply Cap 13,100,000 3,800,000 —
AVAX Borrow Cap NA 1,200,000 At this cap, utilization would be 80%
WBTC.e Supply Cap 5,233 2,000 —
WBTC.e Borrow Cap NA 1,100 —
WETH.e Supply Cap 113,000 38,000 —
WETH.e Borrow Cap 62,150 33,000 —

V3 OP

Asset Parameter Current Parameter Recommended Parameter Notes
AAVE Supply Cap 100,000 45,000 Effectively freeze supply
LINK Supply Cap 258,000 160,000 —
LINK Borrow Cap 141,900 84,000 —
WBTC Supply Cap 1,100 620 Effectively freeze supply
WBTC Borrow Cap 605 250 —

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