[ARC] Risk Parameter Updates for Ethereum Aave v2 Market

Risk General
3

Thanks, @MatthewGraham, for the proposal. Below we offer thoughts and tradeoffs to help the community decide on how to deprecate the FEI market:

  • Should Aave deprecate the FEI market?
    • Yes, FEI should be deprecated in light of Tribe DAO’s proposal to enter a terminal state.
  • How should the community deprecate FEI?
    • Option 1: Freeze the FEI market and set the liquidation threshold and liquidation penalty to 0%
      • Most effective way to force unwind the position
      • Users with only FEI collateral can be liquidated (or forced to unwind) without penalty. However, the incentive for liquidating these positions is unknown
      • Users with FEI and other collaterals are likely to be liquidated with a penalty since liquidators can potentially pick another collateral with a non-zero liquidation incentive to liquidate the position
      • Users need to top up the positions to avoid potential liquidations
    • Option 2: Freeze the FEI market, set the reserve factor to 100%, and slowly lower the liquidation threshold
      • Less aggressive way to unwind the market
      • If RF is 100%, FEI supply interest will be 0%. FEI suppliers are thus incentivized to withdraw the FEI collateral
      • No immediate action is needed from users
  • The optimal strategy that balances the effectiveness of unwinding with the impact on users depends on how users use the collateral, especially in this case where the FEI team provided 90%+ of the liquidity to the pool.
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