ARC: LTV and Liquidation Threshold Levels 2021-08-26

Simple Summary

Three distinct levels from which the community can select a preferred risk tolerance for Aave V2.

Abstract

From a market risk perspective, the goal for Gauntlet’s simulations is to standardize Value-at-Risk (VaR) across all assets. Matching risk tolerance to a normalized expected yield throughout Aave V2 ensures no subset of assets adds disproportionate risk to the Safety Module.

Following asset onboarding, empirical data on user behaviour (e.g., average health factors) and changes in market conditions (e.g., expected slippage) improve our simulation precision. Improved precision allows for higher confidence in model outputs—particulary for aggressive recommendations.

Gauging risk appetite is something Gauntlet will do quarterly to ensure our risk parameter recommendations track the preference of the Aave community.

Motivation

The existing risk framework has been instrumental in facilitating onboarding new assets. As expected and observed, liquidity risk, volatility risk, and market capitalization frequently change for all assets on Aave. Updating LTV and Liquidation thresholds to remain in lockstep with the market is key to improving the target metrics outlined in Gauntlet’s Dynamic Risk Parameters proposal.

Specification

Current LTV/Liq_Threshold Conservative LTV Moderate LTV Aggressive LTV Conservative Liq_Threshold Moderate Liq_Threshold Aggressive Liq_Threshold
USDC (80%, 85%) 80 82.5 85 85 85 87.5
DAI (75%, 80%) 75 75 80 80 80 82.5
TUSD (75%, 80%) 75 80 80 80 82.5 82.5
WBTC (70%, 75%) 65 70 75 70 75 80
WETH (80%, 82.5%) 80 80 82.5 82.5 85 85
REN (55%, 60%) 45 55 55 55 60 65
BAT (70%, 75%) 70 70 75 75 75 80
YFI (40%, 55%) 45 45 55 60 60 65
DPI (60%, 70%) 55 60 60 65 70 75
LINK (70%, 75%) 65 70 70 70 75 80
BAL (55%, 60%) 55 65 70 65 70 75
MKR (60%, 65%) 60 65 70 65 70 70
ZRX (60%, 65%) 60 60 65 65 70 70
UNI (60%, 65%) 50 60 65 60 70 70
KNC (60%, 65%) 60 60 65 65 70 70
CRV (40%, 55%) 30 40 45 45 55 60
XSUSHI (25%, 45%) 30 35 45 50 60 60
ENJ (55%, 60%) 40 50 55 55 60 65
AAVE (50%, 65%) 55 60 65 70 70 75
SNX (15%, 40%) 15 20 25 40 45 55

Key Model Inputs & Notes

Asset Volatility
USDC 0.014
DAI 0.017
TUSD 0.031
WBTC 0.72
WETH 0.994
REN 1.05
BAT 1.08
YFI 1.11
DPI 1.12
LINK 1.16
BAL 1.17
MKR 1.255
ZRX 1.311
UNI 1.331
KNC 1.357
CRV 1.4
XSUSHI 1.51
ENJ 1.612
AAVE 1.72
SNX 1.86
  • WBTC: Downside slippage values for WBTC have become smaller. This means liquidators see less slippage on trades and more liquidity. Additionally, a tight liquidation buffer will suffice given the lower market volatility.
  • YFI: Both slippage values and volatility have improved for YFI. The liquidation buffer shrinks between conservative and aggressive parameters due to marginal increase of liquidations observed during simulation. Doing so provides users an option to be more aggressive with starting positions should they choose.
  • LINK: Given market liquidity and LINK supplier’s borrow positions, the aggressive setting will only include an increase in liquidation threshold.
  • xSUSHI: Recent liquidation analysis on empirical data, lacking previously, provides higher confidence that insolvency events can be mitigated.
  • SNX: The major concern with for SNX is that there is very high volatility and high slippage. The aggressive setting requires a larger delta between LTV and liquidation threshold to compensate for the additional risk.
Asset Slippage Intensity Sell Slippage Power Sell
WBTC -0.134 0.52
YFI -1.003 1.008
LINK -5.648 1.14
XSUSHI -0.864 1.049
SNX -17.007 1.477

Next Steps

  • Due to minimal feedback and conversation on Gauntlet’s ARC for Liquidation Bonus Updates we will plan to post a Snapshot on 2021-08-31. Should debate ensue we will delete the poll, respond to questions, and make clarifications as long as needed.
  • AIP creation the first weekday following the completion of a successful Snapshot vote. The current target is 2021-09-07.
4 Likes

Is it possible to share a little more about the methodology and definitions used? I’d appreciate detail about the following:

  • How are the volatility indexes calculated?
  • How do we interpret the slippage intensity sell and slippage power sell parameters?
  • Do the simulations take into account the new gas price dynamics from EIP-1559?
  • Is it possible for Gauntlet to provide a more detailed opinion on conservative, moderate, and aggressive thresholds? Is there any metric that you can provide that would reflect the added risk of adopting more aggressive thresholds?

I’d love to see AAVE be as aggressive as possible in their parameters as long as it is deemed to be safe, but I believe the community may have a hard time making that judgement with just the information given here. Thanks for your awesome work otherwise.

4 Likes

I have a few answers to your questions and will get the others as soon as possible.

The volatility is calculated by using the Garman-Klass volatility estimator. The detailed methodology is described in this paper.

The following equation is used to model slippage: intensity * volatility * (trade size / average daily trading volume) ^ power. We use the historical order book data to fit the intensity and power coefficients. The price slippage is proportional to the intensity coefficient and the power of the quantity traded.

The simulation doesn’t take the EIP-1559 gas price dynamics into account. Please see section C.4 in our Aave Market Risk Assessment for the details of network congestion modeling.

1 Like

Conservative metrics: the models target a 15% decrease on each side of the capital efficiency (opportunity cost of capital) as well as risk metrics (some conflation of liquidations, insolvencies, and market impact) on each asset.

Moderate metrics: target a similar risk profile to the current risk parameters with reweightings to achieve slightly better capital efficiency.

Aggressive recommendations target a 10% increase for capital efficiency (opportunity cost of capital) with considerations for the same risk metrics (liquidations, insolvencies, and market impact) on each asset.

Our models suggest there is headroom to make further updates across most Aave v2 assets. These initial changes look more at specific asset values that are suboptimal and baseline the risk appetite of the community. The Risk Dashboard currently in production will be able to provide much of that granularity in the near future.

1 Like

Snapshot voting will start soon.

We would like to encourage greater participation given AIPs can’t have multiple choices and this will dictate the target risk levels for the next 90 days (unless another vote is opened by the community).

Moderate Parameter Updates

{
“AAVE”: {
“symbol”: “AAVE”,
“address”: “0x7fc66500c84a76ad7e9c93437bfc5ac33e2ddae9”,
“ltv”: “6000”,
“liquidationThreshold”: “7000”
},
“BAL”: {
“symbol”: “BAL”,
“address”: “0xba100000625a3754423978a60c9317c58a424e3d”,
“ltv”: “6500”,
“liquidationThreshold”: “7000”
},
“BAT”: {
“symbol”: “BAT”,
“address”: “0x0d8775f648430679a709e98d2b0cb6250d2887ef”,
“ltv”: “7000”,
“liquidationThreshold”: “7500”
},
“CRV”: {
“symbol”: “CRV”,
“address”: “0xd533a949740bb3306d119cc777fa900ba034cd52”,
“ltv”: “4000”,
“liquidationThreshold”: “5500”
},
“DAI”: {
“symbol”: “DAI”,
“address”: “0x6b175474e89094c44da98b954eedeac495271d0f”,
“ltv”: “7500”,
“liquidationThreshold”: “8000”
},
“DPI”: {
“symbol”: “DPI”,
“address”: “0x1494ca1f11d487c2bbe4543e90080aeba4ba3c2b”,
“ltv”: “6000”,
“liquidationThreshold”: “7000”
},
“ENJ”: {
“symbol”: “ENJ”,
“address”: “0xf629cbd94d3791c9250152bd8dfbdf380e2a3b9c”,
“ltv”: “5000”,
“liquidationThreshold”: “6000”
},
“KNC”: {
“symbol”: “KNC”,
“address”: “0xdd974d5c2e2928dea5f71b9825b8b646686bd200”,
“ltv”: “6000”,
“liquidationThreshold”: “7000”
},
“LINK”: {
“symbol”: “LINK”,
“address”: “0x514910771af9ca656af840dff83e8264ecf986ca”,
“ltv”: “7000”,
“liquidationThreshold”: “7500”
},
“MANA”: {
“symbol”: “MANA”,
“address”: “0x0f5d2fb29fb7d3cfee444a200298f468908cc942”,
“ltv”: “6000”,
“liquidationThreshold”: “6500”
},
“MKR”: {
“symbol”: “MKR”,
“address”: “0x9f8f72aa9304c8b593d555f12ef6589cc3a579a2”,
“ltv”: “6500”,
“liquidationThreshold”: “7000”
},
“REN”: {
“symbol”: “REN”,
“address”: “0x408e41876cccdc0f92210600ef50372656052a38”,
“ltv”: “5500”,
“liquidationThreshold”: “6000”
},
“SNX”: {
“symbol”: “SNX”,
“address”: “0xc011a73ee8576fb46f5e1c5751ca3b9fe0af2a6f”,
“ltv”: “2000”,
“liquidationThreshold”: “4500”
},
“XSUSHI”: {
“symbol”: “XSUSHI”,
“address”: “0x8798249c2e607446efb7ad49ec89dd1865ff4272”,
“ltv”: “3500”,
“liquidationThreshold”: “6000”
},
“TUSD”: {
“symbol”: “TUSD”,
“address”: “0x0000000000085d4780b73119b644ae5ecd22b376”,
“ltv”: “8000”,
“liquidationThreshold”: “8250”
},
“UNI”: {
“symbol”: “UNI”,
“address”: “0x1f9840a85d5af5bf1d1762f925bdaddc4201f984”,
“ltv”: “6000”,
“liquidationThreshold”: “7000”
},
“USDC”: {
“symbol”: “USDC”,
“address”: “0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48”,
“ltv”: “8250”,
“liquidationThreshold”: “8500”
},
“WBTC”: {
“symbol”: “WBTC”,
“address”: “0x2260fac5e5542a773aa44fbcfedf7c193bc2c599”,
“ltv”: “7000”,
“liquidationThreshold”: “7500”
},
“WETH”: {
“symbol”: “WETH”,
“address”: “0xc02aaa39b223fe8d0a0e5c4f27ead9083c756cc2”,
“ltv”: “8000”,
“liquidationThreshold”: “8500”
},
“YFI”: {
“symbol”: “YFI”,
“address”: “0x0bc529c00c6401aef6d220be8c6ea1667f6ad93e”,
“ltv”: “4500”,
“liquidationThreshold”: “6000”
},
“ZRX”: {
“symbol”: “ZRX”,
“address”: “0xe41d2489571d322189246dafa5ebde1f4699f498”,
“ltv”: “6000”,
“liquidationThreshold”: “7000”
}
}

1 Like

The nuances of this stuff are over my head. But how will this affect current borrowers, i.e could this suddenly put someone into liquidation status as soon as the levels change?

No liquidation thresholds are decreasing so if this proposal passes no existing positions will be exposed to additional liquidation risk.