Thanks, @eboado @MarcZeller @fig @Llamaxyz @VonNeumann @yaron @A_J @AaveLabs @monet-supply and all. We completely agree that to totally eliminate the specific risk of replicating the CRV situation on other assets, disabling borrowing of the long-tail volatile assets is enough.
However, this proposal is more broad in scope. We should have provided more context in the forum post, but in the interest of time, we wanted to get out the proposal ASAP and offer more context / respond to questions async. We will follow up with more retrospective analysis on CRV, but to clarify:
- This proposal is not aimed at just eliminating the specific risk of replicating the CRV situation on other assets. This is a broader proposal to derisk Aave V2 ETH across many different market risks and potential attack vectors and help position the community for V3 ETH migration. These risks include 1) insolvency risk from liquidation cascades, 2) price manipulation “Mango squeeze” exploits, 3) traders using Aave to avoid high slippage costs and instead borrowing stables against a volatile asset, 4) risk of high utilization (coming from demand to short assets) impeding atomic liquidations, 5) replicating the CRV situation.
- Many factors contribute to our recommendation for this broad approach to derisk Aave V2 ETH. First, from the CRV situation, it is now apparent that traders are indeed willing to risk substantial amounts of their own capital, which, although may not turn out to be profitable for them, can cause insolvency on Aave. This data should change the security threshold that is incorporated into recommendations. Second, we have received feedback that the community’s risk preference on V2 may now be lower than in the past. Third, the community has begun to consider migration towards V3, and there are now clearer timelines for V3 ETH deployment.
- This is not a shotgun approach to derisk Aave V2 ETH. Rather, we analyze the risk profile of specific assets and their usage. Our platform continues to assess the risk profile of these assets.
- This is why assets like LINK and UNI were not initially included in our proposal. This is because our analysis shows they are at lower risk than the other assets in the proposal. However, if the community’s risk tolerance is such that they would like to pause borrowing for these assets, then Gauntlet is supportive in order to further derisk V2 and prepare for V3 migration.
- This is also why we include low-usage assets like ENJ and USDP in the proposal, where the benefits of keeping these assets on V2 are ambivalent.
- Thanks for bringing this up. There is a broad misunderstanding that the recent increases of USDC LT (85% to 89% over the last year) were the driver behind insolvency. This total insolvency size depends on factors like the oracle updates, liquidator behavior, and size of the position. The fundamental driver behind the insolvency was allowing a user to put on a short position of significant size relative to the circulating supply of the asset. Would a lower USDC LT have reduced insolvency? Absolutely - but the LT reduction would have to be substantial - much lower than the 85% it started at.
- In de-risking V2 ETH, we value user experience and want to best balance the tradeoffs between user experience and risk/V3 migration. @eboado provided valuable feedback on different paths for encouraging migration. We try to keep this in mind and would note that freezing assets do not meaningfully impact existing user positions (users are not immediately liquidated, they can pay back their borrow positions as normal, etc.). Freezing these assets that contribute to ~5% of Aave V2 ETH’s total TVL that contribute to a significant amount of risk on the protocol is a tradeoff we recommend for the protocol.
As many people on this thread have rightfully said - V3 has much better tools for managing risk. We look forward to using those to support assets when that is launched. We hope this helps clarify the proposal’s rationale and risk/reward tradeoffs and welcome community feedback.