Setting LTV to 0 definitely helps everywhere, but on the Avalanche v3 Pool, given that cross-chain infrastructure doesn’t cover Avalanche, the Aave Guardian can act immediately.
Setting LTV to 0 in practise discounts the “borrowing power” of the asset, without affecting the HF of any user position
While Gauntlet’s recommendation is to pause, as an interim next step the community can proactively freeze stablecoins and set LTV as zero.
Once the other risk provider of the community (@ChaosLabs) confirms these steps should only be positive from a risk perspective, we will coordinate with the Aave Guardian on Avalanche to execute this protective action.
For the sake of complete transparency, the payload to be used (freezing and setting LTV to 0) can be found here https://snowtrace.io/address/0x85fb6dff5f59695d77cc61898e60d040165b1923#code#F14#L1
We support the proposal of freezing all stablecoins on Avalanche by setting LTV to 0. In addition, we recommend pausing stablecoin markets across all Aave deployments as a temporary phase until USDC, DAI, and other stablecoin peg situations clarify.
At this point, we don’t recommend fully pausing supply and borrowing, mostly in order to allow existing borrowers to deposit collateral to maintain their positions and avoid liquidations.
We are monitoring liquidations and bad debt / insolvent positions on Aave through the Chaos Labs Collateral at Risk Dashboard. Most liquidations, bad debt, and under-collateralized positions are around stablecoins. The main risk vector we are taking into account is a massive in-flow of risky stablecoins into the protocol increasing bad debt. Therefore, our initial recommendation is to pause stablecoin markets on Aave across all deployments, because of the contagion effect as we have seen with DAI/USDC.
We are flagging the $9.5M in current under-collateralized positions which together hold over $800K of bad debt, mostly on Avalanche stablecoins through E-Mode. These positions are slowly clearing out through liquidations.
source: Chaos Labs Risk Explorer
Following the confirmation by both risk providers of the community, we can confirm the Aave Guardian has executed the freezing of USDC, USDT, DAI, FRAX, and MAI on Aave v3 Avalanche, together with setting their LTV to 0.
To insist: this doesn’t affect anyhow the current Health Factor of active positions, only disables providing more liquidity or borrowing on these assets, together with borrowing more against them
Aave Companies supports Aave DAO freezing USDC, USDT, DAI, FRAX, and MAI on Aave V3 Avalanche. This action prevents new risk from entering the V3 Avalanche market while users can continue to manage their positions in other assets as normal.
Contributors and Guardians have taken quick action to limit risk. We appreciate the Aave DAO’s quick action, conservative risk management and robust process to reduce risk, and we encourage continued analysis and stress testing across all Aave deployments.
Isnt this exactly what the price sentinal is supposed to handle?
To pause markets so drastically so soon after v3 launches when v3 was supposed to address what caused mass freeze/pausing after the curve squeeze sets a very bad precendent and harms the reputation of Aave v3 before it has had a chance to demonstrate what it is capable of.
I think precaution is correct here. And it only affects one market for now. Better safe than sorry. Would aave be way bigger and had a way bigger treasury I would say it’s not necessary but Aave is still young and needs to grow till it’s mature enough to handle every situation or can repay bad debt fully.
Quick update from the Chaos war room - we are conducting an ongoing analysis of the situation throughout the day, focused on assessing an alternative path forward to pausing all V2 and V3 markets.
Pausing all markets is clearly a robust risk-mitigating step regarding a momentary/temporary depeg of stablecoins. However, it may lead to bad debt from the inability to liquidate other (non-stablecoin) assets in a case of a broader market downturn. With SVB’s collapse and USDC’s exposure coming to the forefront of markets on Friday, we may see a spike in volatility across markets globally.
To this end, we’re conducting a holder and position analysis across V2 and V3 deployments and simulating different price drop trajectories across various asset classes. We aim to quantify potential loss for these scenarios, which will help provide a holistic recommendation on the path forward. We will share our conclusions after completing this research and further analysis.
Update: Gauntlet is in touch with community contributors. Under certain conditions, Gauntlet proposes pausing all stablecoins on Aave V3 markets that have emode (Arbitrum, Optimism, Avalanche, and Polygon). Most importantly Avalanche and Polygon should be paused if those situations occur.
We support freezing USDC, USDT, DAI, FRAX, and MAI on Aave V3 Avalanche and set the LTV to 0. This will minimize additional risks in case of further de-pegging, not only USDC.
We believed that as of now, we should not fully pause all the supply/borrow markets. We should do a risk assessment across all V2 and V3 deployments.
Thanks, @BristolBlockchain. To clarify - freezing those assets only mitigates risk against new positions, not existing ones, which are already sizable in e-mode markets.
Thank you for your clarification @Pauljlei. But we cannot control the existing position right? i.e. it’s based on the position’s owner to pay out the debt. Can you give your reasoning?
TLDR;
Our recommendation for all deployments currently is not to pause. With the peg restoring, we believe there is a higher risk of incurring bad debt due to non-stable (WBTC, WETH) volatility compared to the threat of a USDC/DAI depeg to 0.85 prices and below.
The inflection point of large bad debt is in the following scenarios:
Unpaused: USDC/DAI reaches 0.85 prices, causing over 2 million bad debt (and a sharp bad debt accumulation thereafter)
Paused Markets: Nonstables (BTC, WETH, etc.) price drops over 40%, causing over $2 million in bad debt (and sharp bad debt accumulation thereafter).
When assessing the situation, we’re addressing the following scenarios:
These scenarios may include a momentary depeg much more significant than the current level.
We are not accounting for a scenario in which USDC completely loses its peg for 2 major reasons:
We have evaluated the possibility of pausing or freezing assets to mitigate protocol risk. The main risks are listed by order of significance, 1 being the riskiest and 5 being the least risky.
For AAVE V3 Deployments:
V → No new risk introduced, subject to market movements
X → New Risk exposure due to stable depeg or new reserve configuration
| Disabling stable collateral (LTV=0), Governance Vote Required | Freezing Stables, Governance Vote Required | Pausing Stables | Pausing All | |
|---|---|---|---|---|
| 1. Toxic In-Flow Risk - New Positions (net new USDC dumped into Aave) | V | V | V | V |
| 2. Toxic In-Flow Risk - Existing Positions | X | X | V | V |
| 3.a. Bad Debt from Liquidations of stablecoins | X | X | V | V |
| 3.b. Bad Debt from other assets | V | V | V | X (liquidations cannot be made as a function of market movements) |
| 4. Leverage Increase by Collateral Withdrawals | X | X | V | V |
| 5. Leverage Increases by increasing borrows | X | X | X | V |
For AAVE V2 deployments:
| Disabling stable collateral (LTV=0) | Freezing Stables | Pausing All | |
|---|---|---|---|
| 1. Toxic In-Flow Risk - New Positions (net new USDC dumped into Aave) | V | V | V |
| 2. Toxic In-Flow Risk - Existing Positions | X | X | V |
| 3.a. Bad Debt from Liquidations of stablecoins | X | X | V |
| 3.b. Bad Debt from other assets | V | V | |
| 4. Leverage Increase by Collateral Withdrawals | X | X | V |
| 5. Leverage Increases by increasing borrows | X | X | V |
Markets Not Paused -Stablecoin Depeg (worst case - liquidation of entire collateral)
Markets Paused (Assuming re-peg) - Loss due to disabling Liquidations Incurred During Volatile Asset Price Crash
V2 Deployment
V3 Deployments
It is important to note that pausing can be introduced via Admin functionality anytime. However, freezing markets requires a governance process and can take several days. Where possible (like Avalanche), we recommend freezing immediately.
For clarity - Gauntlet currently recommends not pausing the market, as a result of the changed conditions since when we recommended pausing here (Gauntlet’s recommendation to pause the market was not implemented at the time we made that recommendation). We may recommend pausing the stablecoin markets under certain thresholds.
Thank you @ChaosLabs for sharing this. We are still in favor of freezing the stable markets and setting LTV to 0. We should act immediately as freezing require governance voting.
For other markets, we should monitor and update accordingly.
To be more specific on Gauntlet’s recommendation above, if we see the price of USDC drop to 0.91 cents again, Gauntlet proposes pausing all stablecoins on Aave V3 markets that have emode (Arbitrum, Optimism, Avalanche, and Polygon) which will stop liquidations on all assets.
USDC recently broke from its $1 peg and prices dropped as low as $0.88. When this happened, liquidations began to fail on multiple Aave markets. USDC e-mode was affected the most, with realized losses of ~$180k. Liquidity for USDC is still much below normal levels. We worked with the AAVE Guardians to suggest a few paths forward. Currently, Aave has frozen the stablecoin markets on Avalanche V3. Unlike pausing, this doesn’t prevent the insolvencies we were worried about, but since the USDC price has recovered, we are not recommending further action at this time. We will let the community know when we are ready to restore full functionality to these markets.
If the price dips and recovers, liquidations will only process on the way up. Rational liquidators will not take on USDC collateral until they are confident they can unload it. This is exactly what we saw play out in the last dip on Friday - you only get adverse liquidations
Many Aave community participants expect USDC to eventually recover to close to a dollar. If price drops below 0.91, adverse liquidations could exacerbate insolvency in e-mode markets like Avalanche. If we see the price of USDC drop to 0.91 cents again, we propose pausing all stablecoins on Aave V3 markets that have emode (Arbitrum, Optimism, Avalanche, and Polygon) which will stop liquidations on all assets. Most importantly Avalanche and Polygon need to be paused if this situations occurs.
In the case that the price falls and stabilizes well below a dollar, we do not expect liquidations to process normally given current liquidity levels. In this case, the protocol will suffer a loss. If prices continue to drop, we may recommend pausing as well as freezing.
| vn | Market | Size | New Bad Debt | Status | Recommendation | Notes |
| V3 | Ethereum | $0.3B | $0 | No Changes Made | No action needed | |
| V3 | Avalanche | $0.24B | $179,750 |
- Stablecoin LTVs set to 0
- Stablecoins frozen |
Standby | See below |
| V3 | Polygon | $0.11B | $3,250 | No Changes Made | Standby | |
| V3 | Arbitrum | $0.061B | $21,930 | No Changes Made | Standby | |
| V3 | Optimism | $0.077B | $0 | No Changes Made | Standby | |
| V2 | Ethereum | $5.2B | $10,000 | No Changes Made | No action needed | |
| V2 | Avalanche | $0.055B | $0 | No Changes Made | No action needed | |
| V2 | Polygon | $0.205B | $0 | No Changes Made | No action needed |
For Avalanche:
| Initiative | Status | ETA | Updates |
| Market Monitoring | In Progress | 3/14/23 PM* | Market montioring is part of our Risk Management service. We are monitoring all markets closely and will notfiy stakeholders as markets change. |
| Risk Recommendations | In Progress | 3/14/23 PM* | We will continue to provide recommendations to the community and Guardians as conditions change in case drastic action needs to be taken. |
| Calls and communications to explain risk with Gaurdian / stakeholders | Complete | 3/11/23 AM | |
| Initial Analysis | Complete | 3/10//23 PM | Our initial analysis was complete early evening on 3/10 and communicated to stakeholders as soon as Gauntlet's analysis predicted that adverse liquidations would happen |
| Initial forum post | Complete | 3/10/23 PM | Link here |
* This is the current best guess for when clarity on USDC value will be provided - we will monitor and provide recommendations as necessary beyond that dateMarket conditions have been trending positively in the past 24 hours, with the most recent news that SVB deposits will be accessible Monday, leading to USDC nearly restoring its peg. Therefore, we stay consistent with our recommendation not to pause any markets and will not be advancing the market freeze or LTV recommendations.
Having said that, as we’ve observed over the weekend, market conditions can change drastically over short time frames. We will continue to monitor market conditions diligently and will update the community with new data or market dynamics that may lead to a different course of action.
Chaos Labs is still in a war room and available 24/7. Please reach out if you have any questions or concerns.
In our previous update (12:30PM ET), Gauntlet communicated that we no longer recommended pausing additional markets, unless the price of USDC dropped to $0.91.
Additionally, while the Treasury, Federal Reserve, and FDIC have stepped in to insure the deposits for SVB and Circle’s other key banking partners, we are still waiting for markets to open and prices to stabilize before we will resume normal operation. In the meantime, we will continue monitoring and driving the other initiatives below.
If the price dips and recovers, liquidations will only process on the way up. Rational liquidators will not take on USDC collateral until they are confident they can unload it. This is exactly what we saw play out in the last dip on Friday and Saturday - you only get adverse liquidations
Many Aave community participants expect USDC to eventually recover to close to a dollar. If price drops below 0.91, adverse liquidations could exacerbate insolvency in e-mode markets like Avalanche. If we see the price of USDC drop to 0.91 cents again, we propose pausing all stablecoins on Aave V3 markets that have emode (Arbitrum, Optimism, Avalanche, and Polygon) which will stop liquidations on all assets. Most importantly Avalanche and Polygon need to be paused if this situations occurs.
In the case that the price falls and stabilizes well below a dollar, we do not expect liquidations to process normally given current liquidity levels. In this case, the protocol will suffer a loss, but there is little to do here except freezing the stablecoin markets, which already has been done.
No action is recommended right now. Several markets are on standby.
| vn | Market | Total Market Size | New Bad Debt | Status | Recommendation | Notes |
| V3 | Ethereum | $0.62B | $0 | No Changes Made | No action needed | |
| V3 | Avalanche | $0.36B | $259,000 |
- Stablecoin LTVs set to 0
- Stablecoins frozen |
Standby | See below |
| V3 | Polygon | $0.18B | $3,000 | No Changes Made | Standby | |
| V3 | Arbitrum | $0.104 B | $22,000 | No Changes Made | Standby | |
| V3 | Optimism | $0.087B | <$1000 | No Changes Made | Standby | |
| V2 | Ethereum | $6.03B | $10,000 | No Changes Made | No action needed | |
| V2 | Avalanche | $0.055B | $0 | No Changes Made | No action needed | |
| V2 | Polygon | $0.205B | $0 | No Changes Made | No action needed |
For Avalanche:
| Initiative | Status | ETA | Updates |
| Market Monitoring | In Progress | 3/14/23 PM* | Market montioring is part of our Risk Management service. We are monitoring all markets closely and will notify stakeholders as markets change. |
| Risk Recommendations | In Progress | 3/14/23 PM* | We will continue to provide recommendations to the Guardians as conditions change in case drastic action needs to be taken. |
| Calls to explain risk with stakeholders | Complete | 3/11/23 AM | |
| Initial Analysis | Complete | 3/10//23 PM | Our initial analysis was complete early evening on 3/10 and communicated to stakeholders as soon as we verified e-mode liquidations might fail. |
| Initial forum post | Complete | 3/10/23 PM | Link |
| Update for forums, 3/12 | Complete | 3/12/23 PM | Link |
* This is the current best guess for when we will get clarity on USDC value - we will monitor and provide recommendations as necessary beyond that dateIn our previous update (Mar 12, 2023 11:30PM ET), Gauntlet communicated that we no longer recommended pausing additional markets, unless the price of USDC dropped to $0.91.
Additionally, while the Treasury, Federal Reserve, and FDIC have stepped in to insure the deposits for SVB and Circle’s other key banking partners, we are still waiting for markets to open and prices to stabilize before we will resume normal operation. In the meantime, we will continue monitoring and driving the other initiatives below.
In our previous update (12:30PM ET), Gauntlet communicated that we no longer recommended pausing additional markets, unless the price of USDC dropped to $0.91.
Additionally, while the Treasury, Federal Reserve, and FDIC have stepped in to insure the deposits for SVB and Circle’s other key banking partners, we are still waiting for markets to open and prices to stabilize before we will resume normal operation. In the meantime, we will continue monitoring and driving the other initiatives below.
If the price dips and recovers, liquidations will only process on the way up. Rational liquidators will not take on USDC collateral until they are confident they can unload it. This is exactly what we saw play out in the last dip on Friday and Saturday - you only get adverse liquidations
Many Aave community participants expect USDC to eventually recover to close to a dollar. If price drops below 0.91, adverse liquidations could exacerbate insolvency in e-mode markets like Avalanche. ** If we see the price of USDC drop to 0.91 cents again, we propose pausing all stablecoins on Aave V3 markets that have emode (Arbitrum, Optimism, Avalanche, and Polygon) which will stop liquidations on all assets. Most importantly Avalanche and Polygon need to be paused if this situations occurs. **
In the case that the price falls and stabilizes well below a dollar, we do not expect liquidations to process normally given current liquidity levels. In this case, the protocol will suffer a loss, but there is little to do here except freezing the stablecoin markets, which already has been done.
No action is recommended right now. Several markets are on standby.
| vn | Market | Total Market Size | New Bad Debt | Status | Recommendation | Notes |
| V3 | Ethereum | $0.62B | $0 | No Changes Made | No action needed | |
| V3 | Avalanche | $0.36B | $259,000 |
- Stablecoin LTVs set to 0
- Stablecoins frozen |
Standby | See below |
| V3 | Polygon | $0.18B | $3,000 | No Changes Made | Standby | |
| V3 | Arbitrum | $0.104 B | $22,000 | No Changes Made | Standby | |
| V3 | Optimism | $0.087B | <$1000 | No Changes Made | Standby | |
| V2 | Ethereum | $6.03B | $10,000 | No Changes Made | No action needed | |
| V2 | Avalanche | $0.055B | $0 | No Changes Made | No action needed | |
| V2 | Polygon | $0.205B | $0 | No Changes Made | No action needed |
For Avalanche:
* This is the current best guess for when we will get clarity on USDC value - we will monitor and provide recommendations as necessary beyond that date| Initiative | Status | ETA | Updates |
| Market Monitoring | In Progress | 3/14/23 PM* | Market monitoring is part of our Risk Management service. We are monitoring all markets closely and will notify stakeholders as markets change. |
| Risk Recommendations | In Progress | 3/14/23 PM* | We will continue to provide recommendations to the Guardians as conditions change in case drastic action needs to be taken. |
| Calls to explain risk with stakeholders | Complete | 3/11/23 AM | |
| Initial Analysis | Complete | 3/10//23 PM | Our initial analysis was complete early evening on 3/10 and communicated to stakeholders as soon as we verified e-mode liquidations might fail |
| Initial forum post | Complete | 3/10/23 PM | Link |
| Update for forums, 3/12 | Complete | 3/12/23 PM | Link |