ARC: Risk Parameter Updates 2022-01-14

Simple Summary

A proposal to adjust twelve (12) total risk parameters across eight (8) Aave V2 assets including LTV, Liquidation Threshold, and Liquidation Bonus.

Abstract

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

Motivation

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

In addition, we propose to enable utilizing FEI as a collateral on Aave. The initial parameters for FEI will be an LTV of 50%, a Liquidation Threshold of 60%, and a Liquidation Bonus of 6.5%. Most of the stablecoins that can be used as collateral are more liquid, and our platform’s analysis recommends initially capping the amount of collateral that can be liquidatable to the average daily trading volume. If user behavior and market conditions over the coming months continue to show safe conditions for increasing capital efficiency on FEI, we shall recommend ramping up the LTV and Liquidation Threshold incrementally.

Specification

This past week did not see outsized changes in market conditions nor within the Aave protocol. There were slight volatility drops and increases in trading volume and liquidity for most assets. Our platform recommends the following set of parameter changes that will decrease liquidation bonuses on several less-utilized assets.

Parameter Current Value Recommended Value
BAL Liquidation Bonus 8.0% 7.5%
CRV Loan To Value 45% 55%
DPI Loan To Value 65% 70%
DPI Liquidation Bonus 8.5% 7.5%
DPI Liquidation Threshold 70% 75%
ENJ Loan To Value 60% 70%
FEI Loan To Value 0% 50%
FEI Liquidation Threshold 0% 60%
FEI Liquidation Bonus 0% 6.5%
MANA Loan To Value 65% 70%
MKR Liquidation Bonus 8.0% 7.5%
UNI Liquidation Bonus 8.0% 7.5%

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 2022-01-18
2 Likes

Link to the Snapshot vote below:

https://snapshot.org/#/aave.eth/proposal/QmahWfPSdrFpxHDMU39F17wAuB44cVoJvUd4Hi6aYknmdD

1 Like

@Pauljlei notice that most of these assets have been subjects of recent hype and sector trends.

DeFi, Curve Wars, and the Metaverse are all represented in this list.

Is this coincidental or reflective of a surge in demand by users?

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I don’t know if there’s any precedent to it, but it doesn’t feel right to include upgrading an asset to collateral in the risk parameter updates. It seems like it ought to be done in a separate proposal, when the asset was initially onboarded as borrow only.

It gives off the feeling of shoving a potentially controversial change into a bill that’s generally, for better or worse rubber stamped.

That is a really good point

Thank you for your thoughts, @supahjoe and @JeremyKeating . For context, there has been no precedent for this, but following community feedback and internal discussion, we have decided to split into separate proposals moving forward in order to allow the community to make more granular decisions. We will put up an on-chain proposal to upgrade Fei to a collateral asset on Tuesday, January 18th. Following this proposal, we will make a separate proposal for our regular set of parameter recommendations. As always, we will cancel/revise our regular set of parameter recommendations should market conditions change significantly and our simulations dictate it necessary.

2 Likes

Thanks @fig - while we do not make the parameter updates in response to the “hype”, there have been increased market liquidity and trading volume in these assets. These parameter recommendations reflect the market data (which includes increased user demand, as you suggested) which has indicated that market conditions including volatility and liquidity of assets have improved, making it safe to update these risk parameters to increase capital efficiency.

1 Like

Were the minting permissions and other potential technical risks of FEI thoroughly analysed before the decision for activation as collateral @Pauljlei ?
It is pretty important to have a good overview of them before this critical decision.

1 Like

It is another good point @Pauljlei. Has there been any assessment of the governance and smart contract risks? I know it is the sort of thing the risk DAO would be good for. These risks are more important if the assets is going to be used for collateral
Do you have stats on FEI’s deviation from the USD? I think I remember something about it being fairly volatile - maybe that was early on