Liquidation threshold: 30%
Liquidation penalty: 10%
Max LTV: 92.5%
Proposal: Increase of supply cap by 100% to 1m sAVAX (~$23m)
The current sAVAX supply cap on v3 is 500k sAVAX (~ $11.5m) and has been reached within two weeks of listing.
Due to the efficacy of E-mode, where sAVAX can only be used as collateral to borrow AVAX, protocols built on top of aAVAsAVAX (AAVE Avalanche sAVAX) have seen extensive growth with deposits at max supply cap.
The proposal’s goal is to suggest an increase of 100% to 1m sAVAX supply cap via the fast-track process as outlined here.
Reasons for increase:
DEX Liquidity and Conversion Rate: Despite market conditions, DEX liquidity has remained around $40m across Platypus, TraderJoe and Pangolin. This can facilitate healthy liquidations if ever necessary. However, at the time of writing, there has not been any necessary liquidations of sAVAX on AAVE.
As Liquid Staked AVAX, there exists a pseudo peg to AVAX on secondary markets such as Platypus. Due to the nature of the asset, the conversion rate of sAVAX:AVAX has been quite closely maintained due to natural price arbitrage and a 15-days redemption window.
LTV and E-mode: sAVAX has a modest LTV on normal mode, at 20%, where there exists a healthy spread of price deviation to facilitate liquidations if necessary. On E-mode, only AVAX can be borrowed against sAVAX, which is a highly correlated asset with healthy liquidity on DEXs.
Maturing Asset: The cap was initially set as it was a deployment of a new pool. sAVAX has been listed for more than 2 weeks (listed 30th June 2022) and has been near supply cap since. As an asset, sAVAX is relatively mature, having launched in February 2022 and having undergone tumultuous market conditions and stress testing.
At its peak, there were over 4.27m AVAX staked within the BENQI protocol, with users claiming over 2.05m AVAX (> 46%) from the protocol on multiple occasions within days as documented by DefiLlama.
We look forward to the discussion on increasing the Supply Cap of sAVAX on v3 by 100% to 1m sAVAX and your participation in the Snapshot that will go live within 7 days of this post.
sAVAX launched on AAVE since 30th June. After the launch, the total supply of sAVAX increased fast by 26%, about 800,000. According to estimates, there is about 200,000 - 300,000 new sAVAX tokens minted because of the leveraged staking strategy.
The impacts of the proposal after it is passed
The supply APY of sAVAX on AAVE is 3.55%, and the borrow APY is 4.4%.
If the supply cap of sAVAX doubles, and is full, the supply APY will be 1.77%.
About 250,000 AVAX will be borrowed due to leveraged staking , so the borrow APY of AVAX will be around 5.76%.
By using CIAN’s leveraged staking strategy, the APY for AVAX can be 30.536%.
Absolutely! The original pool was filled in a few days. The E-mode applicable on the AVAX/sAVAX pair has an incredible potential for related strategies. This would be a plus for both AAVE V3 and the Avalanche ecosystem.
I don’t see any drawbacks here. That is a total and absolute YES!
The Aave team/community was wise to cap the supply of sAVAX initially, and they should extend that wisdom here and should not increase the supply cap of sAVAX right now, at least not while E-Mode is still active for it.
Per their own analysis above, the only reason that sAVAX is sitting at its supply cap is because of degen farmers leveraging it up to their eyeballs to abuse the extra WAVAX incentives on Aave. While this trade is extremely easy to wind up… unwinding it has challenges that haven’t been battle tested yet. sAVAX has a fifteen day unstaking period… which means that the only way for all these farmers to deleverage without waiting two weeks (per ‘loop’ to use the common language) is to smash the platypus sAVAX/AVAX pool. A relatively modest slip of the live sAVAX/AVAX ratio (a ‘depeg’ as many would call it, even though the term isn’t really accurate) could trigger a liquidation cascade that would do a lot of collateral damage given the massive leverage that so many in this trade are using (automated by platforms like CIAN above).
Speaking of, I would note that neither of the parties proposing this above are neutral third parties here. Both Benqi and CIAN stand to handsomely profit in the form of additional fees if this cap is increased, while taking on none of the increased risk to their treasuries / reputations in the event of a liquidation cascade – whether it happens naturally or as the result of an economic attack (which I suspect would be feasible if the highly leveraged supply on Aave gets too large relative to the liquidity of the handful of markets that the oracle pulls from).
If it’s such a safe and easy change that will only benefit the lending platform, then I would turn it around and ask Benqi why when it comes to their own lending platform – they keep sAVAX at an extremely conservative 20% collateral factor. They are clearly very excited about someone else (Aave) expanding the availability of risky 10x+ leverage on sAVAX while playing it very safe themselves
Give it a couple months, and let’s see how the sAVAX/AVAX ratio holds up to some actual deleveraging events, before considering a doubling of the supply cap. Remember, the core purpose of Aave is not to allow degenerate yield farmers to abuse token incentives at 12x leverage, and it is certainly not to facilitate third party platforms automating those strategies while slicing off fees.
Thank you for your response @d-ape. We would like to clarify on the points you made.
From our observations so far, due to the fact that sAVAX can be redeemed for AVAX after 15 days, there are participants who would purchase sAVAX at a discount to the oracle price to then redeem it. In terms of liquidations, positions can be liquidated in chunks to prevent unnecessary price impact and the current liquidity in the market can handle it. Currently, Platypus can process 100k sAVAX in a single tx with 0.695% price impact. The liquidation incentive is over 3x that (2.5%).
Yes, this account carries the BENQI name to inform everyone of our position. We will disclose this better in the future.
AAVE currently has minimal incentives for borrowing AVAX (0.07% APY) and with a supply cap on sAVAX, the leverage is quantified and hence it will not get to be too large relative to the liquidity on AAVE. This is because no strategies will be deployed if AVAX liquidity gets too low as borrowing rate increases because it will be too expensive and cause losses.
In terms of protocol fees, it’s also beneficial to AAVE when users use E-mode as it would mean a higher borrowing rate, thereby increasing revenue to the AAVE treasury.
On BENQI, there is no E-mode, and the normal mode on AAVE has the same collateral factor of 20%. We understand that the purpose of E-mode is to enable an asset to be used efficiently and safely by enabling a higher collateral factor only for a correlated asset. In this case, sAVAX is fully backed by AVAX which is correlated by definition.
Doubling the supply cap would still be significantly lower than the liquidity in the ecosystem. In terms of stress-testing, as documented by DefiLlama, there has been quite a significant redemption of over 46% of total AVAX staked (2.05m AVAX redeemed within days) multiple times since sAVAX was launched.
Thank you @d-ape, we appreciate your feedback as it gives us a chance to clarify certain details:
To add to BENQI’s answer, it’s good to note that, despite the high collateral factor, liquidation events are extremelly unlikely due to 2 factors:
First, the sAVAX/AVAX ratio will keep increasing as time goes by.
Most importantly, AAVE’s sAVAX price feed comes directly from BENQI’s staking data (BENQI Liquid Staking), thus insensitive to external market variation.
As a large AAVE holder/supporter, CIAN supports this proposal for multiple reasons excluding ‘‘handsome profit’’ since we are currently charging no fees for this said strategy.