Simple Summary
A proposal to adjust eleven (11) total risk parameters across seven (7) Aave V2 assets including LTV, Liquidation Threshold, and Liquidation Bonus.
Abstract
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.
Motivation
This set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets. As a heads up, Gauntlet will publish a blog post soon on our parameter recommendation methodology to provide more context to the community
Our parameter recommendations are driven by an optimization function that balances 3 core metrics: insolvencies, liquidations, and borrow usage. Our parameter recommendations seek to optimize for this objective function. Our agent-based simulations use a wide array of varied input data that changes on a daily basis (including but not limited to, asset volatility, asset correlation, asset collateral usage, DEX / CEX liquidity, trading volume, expected market impact of trades, and liquidator behavior). Our simulations tease out complex relationships between these inputs that cannot be simply expressed as heuristics. As such, the input metrics we show below can help understand why some of the param recs have been made, but should not be taken as the only reason for recommendation. Our individual collateral pages on the dashboard cover other key statistics and outputs from our simulations that can help with understanding other interesting inputs and outputs related to our simulations. For more information, please refer to our Aave market risk assessment where we provide a tactical understanding of our model architecture.
Specification
These past two weeks saw slight decreases in volatility and increases in liquidity and trading volume, which our simulations picked up on. In addition, our recent market downturn report showed that many collaterals are resilient to insolvencies, as our simulation models have predicted. We will continue to adjust risk parameters to drive increases in capital efficiency while maintaining protocol risk at safe levels.
| Parameter | Current Value | Recommended Value |
|---|---|---|
| CRV Loan To Value | 45% | 55% |
| CRV Liquidation Threshold | 60% | 65% |
| FEI Loan To Value | 50% | 60% |
| FEI Liquidation Threshold | 60% | 70% |
| LINK Liquidation Bonus | 7.5% | 6.5% |
| MKR Liquidation Bonus | 8.0% | 7.5% |
| SNX Loan To Value | 40% | 45% |
| SNX Liquidation Threshold | 60% | 65% |
| xSUSHI Loan To Value | 45% | 50% |
| xSUSHI Liquidation Threshold | 60% | 65% |
| UNI Liquidation Bonus | 8.0% | 7.5% |
See below volatility and exchange volume data from 01/18 to 02/09. These are useful metrics to build intuition but are not the only inputs our simulations take into account in our parameter recommendations off of.
| Symbol | 02-09 Volatility | 01-18 Volatility | Volatility Change | Weekly Average Daily Volume Change (%) |
|---|---|---|---|---|
| CRV | 1.586428486 | 1.611794518 | -0.025366032 | -48.2544541 |
| FEI | 0.076148592 | 0.054860766 | 0.021287826 | -65.5712964 |
| LINK | 1.322292723 | 1.293466069 | 0.028826654 | -38.7660331 |
| MKR | 1.136936786 | 0.972006147 | 0.164930639 | 209.0123383 |
| SNX | 1.251241404 | 1.323555377 | -0.072313973 | 97.3261162 |
| SUSHI | 1.373581906 | 1.637707787 | -0.264125881 | -30.8229681 |
| UNI | 1.256113579 | 1.19104143 | 0.065072149 | 20.3782517 |
Risk Dashboard
The community should use Gauntlet’s Risk Dashboard to better understand the updated parameter suggestions and general market risk in Aave V2.
Value at Risk represents the 95th percentile insolvency value that occurs from simulations we run over a range of volatilities to approximate a tail event.
Liquidations at Risk represents the 95th percentile liquidation volume that occurs from simulations we run over a range of volatilities to approximate a tail event.
Next Steps
- Initiate a Snapshot immediately since the community has already weighed in on changes of this nature recently.
- Targeting an AIP on 2022-02-15