[ARC] Stablecoin Volatility Risk Parameter Recomendations

Governance
23

Gauntlet Market Update (3/12/2023 12:30PM ET)

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.

Overview

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.

Key Metrics

Key Risks

1 - Price dip and recovery

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.

2 - Price stabilizes at a lower level

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.

Current Gauntlet Recommendations

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:

  • Loss due to adverse liquidations after USDC price recovery. Changes summarized here. If USDC price begins to drop again, we may want to disable liquidations on USDC if possible. Otherwise, when prices stabilize, we can turn the market back to full functionality

Current Initiatives

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 date
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