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.
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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.
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.
- Here is an example of small liquidations that will go through once the price of USDC stabilizes and liquidators see profitability even if it is in small size ($4k chunks through Trader Joe V2 pools). These liquidations of this account happened after the price stabilized and recovered, which was the exact hypothesis that we had yesterday. Some of the realized insolvencies could have been prevented by pausing.
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
6 Likes
Market 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.
3 Likes
Gauntlet Market Update (3/12/2023 11:30PM ET)
Overview
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.
Gauntlet’s estimate of USDC redemption rates by custody provider
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 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.
- Here is an example of small liquidations that will go through once the price of USDC stabilizes and liquidators see profitability even if it is in small size ($4k chunks through Trader Joe V2 pools). These liquidations of this account happened after the price stabilized and recovered, which was the exact hypothesis that we had yesterday. Some of the realized insolvencies could have been prevented by pausing.
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, but there is little to do here except freezing the stablecoin markets, which already has been done.
Current Gauntlet Recommendations
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:
- 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 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 date
3 Likes
Gauntlet Market Update (3/13/2023 12:30PM ET)
In 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.
Overview
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.
Gauntlet’s estimate of USDC redemption rates by custody provider
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 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. **
- Here is an example of small liquidations that will go through once the price of USDC stabilizes and liquidators see profitability even if it is in small size ($4k chunks through Trader Joe V2 pools). These liquidations of this account happened after the price stabilized and recovered, which was the exact hypothesis that we had yesterday. Some of the realized insolvencies could have been prevented by pausing.
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, but there is little to do here except freezing the stablecoin markets, which already has been done.
Current Gauntlet Recommendations
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:
- 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
-
*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 |
4 Likes
Hi all - Wanted to get a bit more of an understanding why the Avalanche market remains frozen. Stablecoins have traded more than $20M in volume in stableswap pairs alone yesterday and so it is unclear where the specific risk is and especially to Avalanche only. Thank you!
Considering that prices stabilized, from our perspective seems reasonable for the Guardian to revert the freezing and we can create the technical payload for it.
But first, we would like to have confirmation/not from both Gauntlet (@Pauljlei ) and Chaos Labs (@ChaosLabs) regarding any risk considerations.
3 Likes
With markets stabilizing after the weekend events, Chaos Labs support an immediate unfreezing of the V3 Avalanche reserves.
6 Likes
As prices have stabilized, and local liquidity has recovered to pre-crisis levels, unfreezing the USDC market on Avalanche would return the protocol to a similar risk level to last week. However, the Avalanche market is one of the higher-risk markets for Aave. On-chain liquidity is crucial to successful liquidations on Avalanche, and is still limited. That being said, Gauntlet supports unfreezing the markets, though we remain cautious and will continue to monitor liquidity conditions.
4 Likes
In my opinion, unfreezing the markets on Avalanche side should be done. All prices are stabilized, so there should not be any problem.
1 Like
Hi all, so any idea why the Avalanche market remains frozen? It took a couple hours to freeze it and now two days have passed since everyone agreed it was ok to revert it. This issue is affecting users and the reputation of the protocol. Also if something is indeed going on a little bit of communication wouldn’t hurt so people know what to expect (couple hours, couple days, couple weeks?).
The Avalanche markets have been unfrozen. Thank you to everyone who contributed during this time of uncertainty.
Gauntlet has provided a full retro on how the Aave protocol performed during the stablecoin volatility here, including the actions taken by the community to combat the risks. We encourage anyone interested in learning more about this unique market event to review.
6 Likes