[ARC] - Risk Parameter Updates for Aave v2 Ethereum - LTs and LTVs for Long Tail Assets (2022.12.04)

Risk
1

Simple Summary

A proposal to adjust eight (8) total risk parameters, including Liquidation Threshold (LT) and Loan-To-Value (LTV), for four (4) assets on Aave V2 Ethereum.

Abstract

Following recent market events, the AAVE community has decided to reduce the risk profile across many higher volatile assets by disabling borrow or freezing across v2 markets (AIP-121, AIP-124, and AIP-125)

After mitigating the immediate risk to the protocol with the above AIPs, Chaos Labs is exploring the impact and trade-offs of decreasing the Liquidation Thresholds and LTVs of long-tail assets on Ethereum v2 (ENS, MKR, SNX, and CRV).

This proposal is the second in a series of proposals intended to reduce the viability of different attack vectors on v2 assets.

Motivation

Capital efficiency reductions on v2 assets will further mitigate attack vectors, in part by increasing the capital required to wage a price manipulation attack on Aave. In addition, these changes will act as an effective motivation to shift usage to v3, where users can enjoy the benefits of E-mode with enhanced risk techniques and mitigation methodologies.

As Liquidation Threshold reductions may lead to user accounts being eligible for liquidations upon their approval, we want to clarify the full implications to the community at each step. To best minimize this impact, we suggest reaching the desired settings by a series of incremental decreases, following the Risk-Off Framework previously approved by the community, with a reduction of up to 3% in any given AIP. In an attempt to avoid liquidations, Chaos Labs will communicate the planned amendments 7 days before their on-chain execution via all available avenues (Twitter, forums, Nansen Connect, and Blockscan Chat).

In the graphs below, we share data to quantify and visualize the effect of the recommended reductions on protocol users for community discussion.

:bulb: Mainnet snapshot captured on December 4th, 2022, 16:30 GMT

$CRV

Untitled (4)

$MKR

Untitled (5)

$SNX

Untitled (6)

$ENS

  • Zero (0) liquidations for up to an 8% reduction.

Joint Reduction of $MKR, $CRV, $SNX and $ENS

  • Reducing LTs jointly for the above long tail assets by 3% results in less than 6K USD worth of liquidations
    Untitled (7)

Joint Reductions with $USDC and $DAI

  • The assets can also be reduced jointly with the suggested USDC, DAI change without causing additional liquidations.

Recommendation

Screen Shot 2022-12-05 at 2.13.57 PM

5 Likes
2

Link to Snapshot vote below.
Voting period is from December 8th, 7 PM EST to December 11th, 7 PM EST.

https://snapshot.org/#/aave.eth/proposal/0xd706dfcb631076d5e835e0640d120b8de333d31ef30f66e3dbb529a380608ea1

1 Like
3

Although I wanted Aave risk management act safely and I’m don’t directly subject of these liquidations, I wanted to applause the revue and report of the user possible liquidation. I think taken into account in analysis the consequence of lowering Liquidation Threshold regarding liquidation is a key to keep Aave safe for borrower user. As lowering LTV and freeze is a mechanism who protect lenders and Aave stackers.

1 Like
4

By the way series of incremensal decreases prepend by public communication seems good practice

1 Like
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Following the snapshot vote, we plan to submit an AIP in the coming days with the following suggested amendments:

Asset LT LTV
$ENS 60% → 57% 50% → 47%
$MKR 70% → 67% 65% → 62%
$SNX 65% → 62% 49% → 46%
$CRV 61% → 58% 55% → 52%

To minimize liquidations, we will update this thread daily (until the proposal is executed) with a list of accounts at risk of being liquidated due to the change. Please note that given changes in market prices, the number of accounts on this list may change daily.
In addition, we will be utilizing Nansen Connect and Blockscan Chat to message accounts directly.

2 Likes
6

As of today, 14 total accounts amounting to ~$29K are at risk of liquidation following the proposed changes.
The full list of accounts and their projected health score, given the updated LTs can be found in this sheet.

1 Like
7

We have published this AIP for community members to vote on:

Thank you in advance for your participation in the vote.

Accounts in risk of liquidation:
As of today, 7 total accounts amounting to ~$700 are at risk of liquidation following the proposed changes.
The full list of accounts and their projected health score, given the updated LTs can be found in this sheet.

1 Like
8

As of today, 10 total accounts amounting to ~$392K are at risk of liquidation following the proposed changes.
The full list of accounts and their projected health score, given the updated LTs can be found in this sheet.

The main account leading to the large amount at risk of liquidation is 0xaecdde1672f3f121b3a6c43a2e0b5dfc28f6224c

1 Like
9

As of today, 7 total accounts amounting to ~$5.56K are at risk of liquidation following the proposed changes.
The full list of accounts and their projected health score, given the updated LTs can be found in this sheet.

1 Like
10

As of today, 7 total accounts amounting to ~$5.5K are at risk of liquidation following the proposed changes.
The full list of accounts and their projected health score, given the updated LTs can be found in this sheet.

1 Like
11

As of today, 7 total accounts amounting to ~$5.45K are at risk of liquidation following the proposed changes.
The full list of accounts and their projected health score, given the updated LTs can be found in this sheet.