Thanks for the reply.
I would appreciate a comment from them as well, who is the best person to tag for that?
When the position is below 1 HF. Note that in practice, it would only catch a liquidation that MEV bot does not, so in normal course of events, liquidations would still be executed by MEV bots. and only when DEX liquidity is not sufficient, then liquidations will be done by the backstop.
The liquidation itself is profitable, however, because it will be done only when DEX liquidity is depleted, the liquidators bare a real risk. And hence, we ask to provide them with incentives. This can be seen as an insurance. Given Aave’s history of setting responsible risk params, we believe that 5% apy, in the current market, would be able to attract sufficient liquidity. But of course this might change if there is an alternative APY over the GHO that is less riskier. Though in such case, we may consider to deposit the backstop funds in that alternative, and compound the APY.
The backstop depositors can be seeing as providing an advance insurance mechanism for failed liquidations, and should be paid for that. One possible way to do it is with a discount on GHO borrowing. But a direct payment in the form of tokens or GHO liquidity mining could also work.
This is a great comment. But note that even if GHO has 1:1 liquidity with USDC, with $10B qty, it would still force Aave to be more conservative about GHO debt than on USDC debt.
The reason is that bad USDC debt is on the expense of the Aave suppliers, who are compensated with an interest rate on the risk they take. While bad GHO debt damage the trust (and potentially the pegging) of GHO holders. Who are not compensated for holding GHO, and in general, GHO trust level should be high in order to encourage mass adoption.
To give a concrete example, even if USDC/GHO liquidity is super high, there could be still risk when borrowing GHO with, e.g., CVX collateral.
Hence, a backstop could potentially increase the community trust in the stability of GHO, and mitigates concerns about how new collateral listing would affect the stability of GHO.