Submission 14- AAVE
Timestamp: April 27, 2023, 2:48 PM
Currently, the Harmony recovery program seems to be progressing quite slowly, with less than 10% of the assets depegged burned after ~10 months (~2% of depegged assets burned by the recovery exchange 1 and ~4% of depegged assets burned by modulo 1), so we think it makes sense to consider options targeting a partial recovery.
The objectives of the following technical solution are:
Provide a mechanism for Recovery One (or anybody else) to provide liquidity of ONE and LINK to the affected users.
Reduce or completely remove the outstanding debt on the Aave v3 Harmony pool.
The solution: decaying oracle
The current Oracle price for depegged assets, following how Chainlink works, is based on the global market price of these assets, not the one applying to Harmony-bridged ones.
Pricing of depegged assets is impossible, because:
If you believe they will re-peg they should be priced at current oracle price minus a discount for the recovery time.
If you believe they won’t re-peg, they should be priced at 0.
There’s no “correct” way to approach this pricing problem, but it is possible to use the oracle as a mechanism for partial recovery.
We propose to introduce a decaying oracle that will continuously discount the price of depegged assets based on time, from the current Chainlink price, till a minimum value (e.g. 5% of the current price) after a predefined amount of time (e.g. 3/6/12 months). During that period, any address will have the option to liquidate these assets at an ever-growing discount. The repayments injected by liquidations will provide holders of ONE and LINK liquidity to withdraw.
The currently liquidatable users can be found on the chaos-labs risk dashboard 5.
This solution should align perfectly with the ethos of the Recovery One Team: if believing in a re-peg, they should have a clear incentive to liquidate as early as possible, as the debt consists mostly of wONE tokens. Also, by liquidating depegged assets with wONE, the Recovery One Team will remove depegged assets from the market, while at the same time providing wONE liquidity for hack victims.
Important to highlight that the mechanism of Aave liquidation itself assures really optimal compensation to affected users, as they receive “directly” the liquidity via the aTokens, without any secondary market mechanism like the one used on the general Harmony recovery.
Liquidating only at a higher discount and later will implicitly price the confidence in the recovery by the recovery team.
Additional considerations
The liquidation bonus of all collaterals should be set to 0 as the discount on the oracle price already acts as a liquidation bonus.
Even if rates are minimal at the moment, the aave-v3-core now provides a zero interest rate strategy that should replace the existing interest rates of all assets on the harmony network.
The Aave DAO Harmony treasury currently holds around 50k USD in assets. The depegged assets should be burned, following the recovery program. These ~2m aONE and ~700 aLINK should be considered a loss and will never be withdrawn.
The Harmony team stopped the liquidity mining shortly after the hack, as incentives didn’t make sense. They also pulled the funds though, which essentially means users can no longer claim their previously promised rewards. Therefore we think it would be reasonable for them or the Recovery One Team to compensate those users, as technically those rewards belong to them.
At the current moment, and without good certainty on the Harmony recovery program, we don’t think any new deployment of Aave should be considered, as there could be technical risks.
It is important to highlight that even if we can help with the technicalities of this proposal, same as with other cases like asset listings, the proposal (Snapshot in this case) should come from the Harmony/Recovery One team or community members.
