ARC: Risk Parameter Updates 2021-12-16

Simple Summary

A proposal to adjust nine (9) total risk parameters across seven (7) Aave V2 assets including LTV, Liquidation Threshold, and Liquidation Bonus. In addition, we propose freezing the KNCL reserve.


This proposal is a batch update of risk parameters to align with the Moderate risk level chosen by the Aave community. These parameter updates are a continuation of Gauntlet’s regular parameter recommendations.


This set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets.


The recent market downturn on the weekend of December 4th led to the most liquidations on both centralized exchanges and in liquidity protocols in the recent past. Most liquidations on the Aave protocol happened between 4:30 and 5:45 UTC when the price of ETH dropped nearly 13%. Below is a graph of liquidation by collateral and repay asset.
Liquidations by collateral and repay asset
Although volatility for assets is slightly higher, the abundance of liquidity and active market participants is a positive sign for the health of Aave! For example, the total value of CRV (curve dao token) liquidated was large compared to the total collateral used on Aave. Lower LTV, lower liquidation threshold, and higher liquidation bonus protect the protocol from insolvencies. However, multiple liquidations of over 400,000 USD occurred in quick succession. This shows ample liquidity for liquidators even in times of high network congestion. These market events provide important data points for measuring tail risk.

For reference, previous analysis of liquidations on Aave from May 2021 can be found here: Aave Protocol Liquidation Retrospective: May 2021 | by Watson Fu | Gauntlet | Medium

Although some assets currently have higher volatility, our analysis shows that it is safe to increase borrowing parameters and decrease liquidation bonus values. Our simulations study price drops and network congestion more extreme than was seen last week, and slippage and liquidity considerations have improved.

Parameter Current Value Recommended Value
BAT Loan To Value 70% 75%
CRV Liquidation Bonus 10.0% 8.5%
ENJ Liquidation Bonus 10.0% 7.5%
REN Loan To Value 55% 60%
REN Liquidation Threshold 60% 65%
SNX Loan To Value 30% 40%
SNX Liquidation Threshold 55% 60%
SUSHI Liquidation Bonus 10.0% 8.5%
ZRX Loan To Value 60% 65%

Freezing KNCL
The KyberDAO approved the proposal to migrate KNC token contract to a new implementation on 4/20, which enables Kyber governance to upgrade KNC efficiently. As of 11/2, 177M of KNC have migrated to the new Kyber Network Crystal (KNC) and 74M of KNC are still in the old KNC Legacy (KNCL) contract. There is currently 916K KNCL supply and 229k total borrowed on Aave.

Considering that exchanges (e.g. Kraken, have stopped supporting KNCL deposit and trading, the liquidity of KNCL has also been reduced. We propose freezing KNCL to speed up the KNC migration as well as eliminating the risk of keeping a less liquid deprecated asset on the platform.

Risk Dashboard

The community should use Gauntlet’s Risk Dashboard to better understand the updated parameter suggestions and general market risk in Aave V2.

Next Steps

  • Initiate a Snapshot immediately since the community has already weighed in on changes of this nature recently.
  • Targeting an AIP on 2021-12-20

@Pauljlei thanks for taking the time to update the community on some of these changes.

A few thoughts and questions.

First - I will examine a few rows in the chart above. This $SUSHI parameter change sticks out in particular:

By lowering the liquidation bonus across a few assets, does this suggest Gauntlet expects more liquidations in the near future / upcoming quarter?

Second - I enjoy your “Collateral Safety” analysis and tags in your report. They are simple yet powerful when applied in context to a collateral asset. See a screenshot for reference below:

Screen Shot 2021-12-17 at 11.26.49 AM

Is it possible to add this to the Aave Protocol UI to better inform users of the risks in borrowing?


Snapshot vote can be found here:


Thanks for your feedback, @fig ! The lowering of liquidation bonuses is not reflective of liquidation frequency. It is dependent on the ability of liquidators to safely trade out liquidated collateral in extreme market conditions. Lowering liquidation bonuses is a result of our analysis showing that liquidators can safely trade out liquidated collateral even with lower bonuses.

We are glad to hear that you find the “Collateral Safety” analysis and tags useful. We would be happy to integrate with the Aave Protocol UI and would welcome the collaboration from the Aave developer team.


In addition, we wanted to notify the community that we resolved a bug with our dashboard data aggregation that attributed the liquidated amount to the borrowed assets instead of to the collateral assets. This caused the dashboard to show a different Value at Risk (VaR) distribution than intended, since the VaR calculation factors both liquidation volume and insolvencies into the calculation. To clarify, this bug was already fixed before this ARC was posted, but we want to keep the community informed.

This did not affect the parameter recommendations we have delivered, and it did not affect our parameter recommendation methodology.

This bug only affected dashboard metrics and not model inputs that drive recommendations. We wanted to give this heads up that the VaR distribution on the dashboard will be different now, but the overall VaR level remains unchanged.

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