ARC: Liquidation Bonus Updates

Simple Summary

A proposal to reduce the liquidation bonus for ten (10) Aave V2 assets.

Abstract

In Gauntlet’s Market Risk Assessment, Liquidation Retrospective: May 2021, and recent ARC for Dynamic Risk Parameters we highlighted the importance of optimizing liquidation bonuses.

For background,

If the bonus is too low, then during extremely volatile or illiquid conditions, liquidators might not be profitable even with the bonus. During these times, there can also be cascading, systemic effects from a lack of liquidations. For each loan that is liquidated, liquidators purchasing the collateral and selling it causes the price to further decrease causing further liquidations. On the other hand, if the bonus is too high, suppliers are losing out on profits to liquidators. Continual monitoring and adjustment of this parameter is crucial for optimizing the security vs. capital efficiency trade-off in Aave.

Motivation

Large liquidation bonuses increase the regime in which the incentives are counterproductive. See section 6.3. Lower liquidation bonuses for a single week in May would have mitigated $4M in depositor losses while maintaining a low risk of insolvency.

User experience is another factor worth considering. Depositor losses occurred for 590 distinct users during the week of May 17-23. Mitigating losses without increasing the net insolvent value percentage or the slashing run percentage is possible.

Specification

Asset Current Liquidation Bonus Recommended Liquidation Bonus Update
ZRX 10% 8%
WBTC 10% 9%
SNX 10% 9%
YFI 15% 12.5%
CRV 15% 12.5%
AAVE 10% 8%
REN 10% 9%
MANA 10% 8%
BAT 10% 9%
XSUSHI 15% 12.5%

Model Inputs

Next Steps

  • Ten (10) days for community feedback and analysis on this post.
  • Target Snapshot submission on August 23, 2020, 3pm UTC / 11am EST / 8am PST (poll to incorporate feedback).
7 Likes

This looks good.
I’m happy to see Gauntlet adding immediate value to the protocol.

2 Likes

Sounds good to me too

1 Like

I’ll be posting a Snapshot on Monday (Aug-23) using these guidelines.

Thanks for your ARC @inkyamze

Gauntlet had identified the need to adapt these liquidation bonus since its previous Aave market risk assessments; great to see action towards the update

Lower liquidation bonuses should reduce price slippage caused by the large volume of Aave liquidity to liquidate on the markets when prices consolidate. Aave would benefit with less potential insolvencies

I personally support this proposal to improve Aave’s resilience

1 Like

https://snapshot.org/#/aave.eth/proposal/QmQ5qCGsgAXrHYDGZNud9U9UjwXYVbaLMEynvzZ62pmzcD

An unfortunate turnout but thanks to @0xbilll for attempting to circulate the Snapshot. Gauntlet will be posting an AIP on Monday (2021-08-30) with the updates above.

Screen Shot 2021-08-27 at 11.19.40 AM

@eboado or @state looks like checks may be in place to ensure the schema is correct but let me know if there are additional steps we can take. Add AIP-draft-liquidation_bonus_updates.md by inkymaze · Pull Request #104 · aave/aip · GitHub

2 Likes