ARC: Q2 Dynamic Risk Parameters

Achieving clarity on Risk Management for AAVE

We are going to move forward with a second vote that will allow for better participation and clearer next steps for Gauntlet, AAVE, and its users. We are targeting 11am PT, Tuesday 11/30 to begin the vote.

While the vast majority of users supported the proposal, we wanted to see if we could modify our deal structure to address the feedback we got from @eboado and @marczeller. As none of this feedback was negative regarding the quality of our work, we are proposing a discounted longer contract that will allow us to focus on adding value to AAVE.

New Pricing

We’ll use a similar but simplified pricing model that extends the contract renewal period to 1y, in turn for a 25% discount on our standard pricing. This results in a price of 7.5bps of total borrow per year. With a 30-day average Total Borrow of $6.74 billion and a 30-Day AAVE TWAP of $308.23, this sizes the AAVE grant at 16,412 AAVE. This provides AAVE with dynamic risk parameterization and a clear risk manager for customers through December 3rd, 2022.

One thing we’d like to reiterate is that Gauntlet’s fee is paid in the AAVE token, with vesting via Sablier. This does not impact the AAVE reserves and for comparison, is less than 2% of the yearly AAVE distribution for liquidity mining. Gauntlet has never sold any AAVE tokens.

  • Like liquidity mining, Gauntlet’s work to manage LTVs and capital efficiency in the protocol can drive growth. Our token grant is tied to the amount of assets in the protocol for this very reason - we want to ensure that the fee we charge is tied to the value we deliver. As @inkymaze mentions above, starting with this renewal we are also supporting fee optimization in each market to ensure we drive as much value to AAVE token holders as possible. Doing some rough math here, a 10% increase in LTVs would result in close to $1B in excess borrow, $40mm of interest payments to AAVE users and $8mm in fees collected by token holders.

The Value We Provide

Fees collected by token holders are not the only way we can help AAVE and its users:

  • We’ve gone above and beyond at every opportunity, including working with the response team for the recent issues with certain assets , pushing the proposal to disable assets that posed a threat to AAVE.
  • As AAVE moves to V3, we’re here to help and work with the team to set reasonable values for parameters like Borrow caps that can help keep the protocol safe and enable the next era of growth
  • In the end, working with Gauntlet is a promise to AAVE’s users that AAVE cares about risk and is working to provide the best capital efficiency that market conditions allow. This is just as important for retaining current users as attracting new ones; even more so for the latter as institutional capital continues to enter DeFi.

We have spent almost three years building our platform to measure and manage risk in DeFi and it is the cumulation of that multiyear effort that has resulted in the platform that AAVE depends on today. This work includes, but is by no means limited to:

  • Heavily modifying geth so that we could run thousands of simulations a day with AAVE’s production smart contracts. This ensures key contributions to risk like liquidation spirals are modeled correctly.
  • Incorporating seven different data providers into our platform to enable that we have accurate market information in our models for all collateral assets, even those with liquidity fragmented across multiple DEXs and CEXs.

We are looking forward to this second vote so we get a clearer signal from the community on how we should proceed. We’re happy to answer any questions people have here and hope that the changes we have made to the original proposal help address some of the concerns raised.