To increase the Liquidation Threshold for AAVE from 65% to 75%.
After a comparison between LINK (75%) and AAVE (65%) liquidation thresholds it became clear to me that AAVE needs to be adjusted upwards given its price action in the last 30 days, based on a price dynamic comparison to the former asset (expressed in ETH since the LT and HF calculations are based on ETH as well).
AAVE: from 0.144 to 0.960 - 33.3% reduction
LINK: from 0.0223 to 0.0142 - 36.3% reduction
Overall AAVE enjoys great liquidity across ETH,BTC and Stablecoin pairs and there is no solid reason as to why it should not benefit from the same liquidation threshold as LINK.
A higher liquidation threshold will improve the Health Factor for AAVE holders that deposited AAVE as collateral and contribute to the protocol TVL, while keeping the LTV ratio the same will limit the borrowing risk that they are allowed to undertake just as before.
Let’s have the comments and polling going until the 11th of January 2021.
I am asking the AAVE Genesis Team or any team/individual possessing the technical capacity for an AIP implementation, to submit the AIP concerning this proposal on the week of the 11th, if judging by the comments and poll results the attitude towards the proposal is positive.
Increase AAVE Liquidation Threshold to 75%
As there were no serious objections to this proposal within the previous week and the poll reflects a positive signal as well, can we move ahead with a simple AIP for a an official vote in this instance? I would like to notify @stani , @Emilio , @Alex_BertoG in order to have the team’s help with the technical implementation of this simple change, if it is accepted by Aave governance via an official vote. I presume there are simple templates already in place for such instances, that can be used by the Genesis team to modify Liquidation Threshold of AAVE to 75%.
The risk team will review your suggestion and post the analysis here
In parallel, Gauntlet will publish soon the Aave Protocol Risk Assessment which will provide parameter optimisation suggestions.
Thank you and the team for the effort! Looking forward to see the results in both instances.
Are there any results regarding a possible update of liquidation threshold for AAVE yet?
The last few months the market has been evolving fast and so have the risks so here is a risk update. Lets focus on $AAVE and $LINK:
In the last month, $AAVE’s market metrics have significantly improved with the daily volume now around $500m nearly matching the $560m of $AAVE on Aave. Liquidity Risk Score is B-
$LINK on the other hand has around $2b of daily volume largely able to handle liquidations of the $680m of $LINK on Aave. Liquidity Risk Score is B+
Historically $AAVE token has been subject to more volatility than $LINK, emphasized by the difference in market capitalisation. This seems to have shifted in the last month, with $LINK showing more volatility than $AAVE and both volatility risk ratings now at C. This change is very recent as last week $AAVE still had a volatility rating of C-.
You have correctly identified, significant improvements in $AAVE’s metrics this month, with risks reducing towards the levels of $LINK but not quite there yet. Increasing $AAVE’s LTV and Liquidation Threshold LT to the levels of $LINK seems a bit premature.
The Risk Team suggests to wait for Gauntlet’s Market Risk recommendations or reassess next month, to optimise the risk parameters once the market metrics have stabilised.
Thank you for the detailed review! Looking forward to the next time when AAVE’s parameters are reevaluated and hopefully they will be sufficient to justify an increase.