[ARC] Updated: Gauntlet <> Aave Renewal

Summary

An updated proposal to renew Gauntlet’s 12-month engagement with Aave on continuous market risk management to maximize capital efficiency while minimizing the risk of insolvency and liquidations to foster long-term sustainable growth.

We received valuable feedback from the community on our initial proposal - thank you for taking the time to do that. This feedback broadly fit into two categories: being more proactive and creating more transparency. Based on this, we have incorporated the following updates into the proposal:

On being more proactive -

  • Overhauling our incident response process, which includes internal and external alerting, escalation, and investigation processes. This new process supplements our simulations and will be supported be a dedicated Gauntlet analytics team for Aave. The goal is to provide the community with much more clarity on how market conditions and risk for Aave are evolving. The incident response process covers key market risks across different assets and different chains for Aave such as external (e.g. DEX) liquidity changes, asset utilization spikes, concentration risk, asset price volatility, reserve utilization, and whale liquidations. Development is in progress and we look forward to working with the community on deciding the best communication channels given the sensitivity of some of these risks.
  • Finding better ways to assess the community’s risk appetite. This includes creating and continuously updating a public-facing risk management framework and actively collaborating with a risk council to increase alignment and create a faster response path.
  • Formalizing an asset delisting process to avoid future market risks on v2. It is now apparent to the community that as market conditions evolve, assets that were originally safe on Aave may no longer be so. There are frictions to delisting assets and differing community opinions - as such, proposing an asset delisting process so that the community can align on the risk-tradeoffs will help streamline governance decisions that de-risk the protocol.

On creating more transparency -

  • Launching an updated dashboard in Q1 that provides significantly more visibility into the data that informs our recommendations including liquidation mechanics, asset listing/delisting, liquidity and slippage, interest rate curves, and depeg scenarios.
  • Creating more content to explain our methodology such as simulation inputs/outputs, sharing monthly updates to inform the community of completed and upcoming risk management workstreams, and Twitter Spaces / calls to talk through key risk decisions.
  • Adding more supporting context (e.g. underlying assumptions, statistics, tradeoffs) on future parameter recommendations to allow the community to better understand our work and help them make decisions.

Lastly, the payment model has been updated to a fixed fee of $2 million for simplicity.

Background

For the past two years, Gauntlet has collaborated with Aave to maximize the protocol’s capital efficiency given an acceptable level of market risk. Over the past year, we have:

Proposal

Scope
Gauntlet’s Risk Management platform quantifies risk, optimizes risk parameters, runs economic stress tests, and calibrates parameters dynamically. We use agent-based simulation models tuned to actual market data to model tail market events and interactions between different users within DeFi protocols. We run over 300,000 simulations on the Aave protocol each week and utilize trained models for lenders, borrowers, and liquidators based on hourly data with multiple forms of out-of-sample cross validation.

As Aave continues to expand (deployments to new markets, migration to a new protocol version, addition of a stablecoin), the level of risk management needed is at its highest - both in terms of the rigor required, but also the speed of risk monitoring and optimizations. Over the past year, we updated our infrastructure to support all Aave deployments simultaneously with the same rigor used to support the Aave v2 Ethereum market. We also stood up a new engineering team (Platform) to exclusively support deployments and doubled the size of our data science and engineering teams. Our work complements that of BGD, Certora, Llama, and others in a joint effort to protect and grow the Aave protocol.

Roadmap

Continued support for Aave v2 Ethereum

  • Immediate support for new asset listings in all markets (v2 and v3) and responding to ad-hoc requests
  • [New] Expanded coverage to all markets
  • Supported risk parameters: Loan-To-Value, Liquidation Threshold, and Liquidation Bonus
  • Market conditions will determine the frequency of parameter updates. For that reason, no SLA will be preset.
  • Responses to market risk events and topics related to risk that progress to voting will be prioritized.

[New] Aave v3 support

  • Aave v3 introduces new mechanisms that pose opportunities and challenges as they relate to managing market risk and optimizing capital efficiency, such as efficiency mode, isolation mode, portals, and siloed borrowing. For more details on v3 support, click here.
  • Coverage of all markets, starting with v3 Avalanche. Should a new market not listed above be deployed, we will expand support to this market and update the community on our timeline. For more details, click here.
  • Supported risk parameters: Loan-To-Value, Liquidation Threshold, Liquidation Bonus, [New] Supply Cap, [New] Borrow Cap, [New] Debt Ceiling (for Isolation Mode)

[New] New Features

  • Insolvency refund: To increase our alignment with Aave and put actual “skin in the game”, we will refund a portion of our payment should our risk parameter optimizations incur insolvencies during the engagement.
  • Interest rate optimization: Subject to community approval for our support. We will optimize interest rate parameters to maximize Aave’s tradeoffs between risk and revenue/reserves. For initial discussion, click here.
  • Asset delisting process: Subject to community approval for our support. We will propose a process for asset delisting to avoid future market risks on v2 and streamline governance decisions to de-risk the protocol.
  • GHO support: Subject to community approval for our support and launch. Scope may include optimizations to debt ceiling, interest rate, and discount rate.

Out of scope

  • Protocol development work (e.g. Solidity changes that improve risk/reward)
  • Formalized mechanism design outside of the supported parameters

Duration
1-year engagement beginning when the corresponding AIP is executed

Objectives

Key Performance Indicators
Gauntlet aims to improve the following key metrics without increasing the protocol’s net insolvent value percentage:

  • Value at Risk: conveys capital at risk due to insolvencies when markets are under duress (i.e., Black Thursday). The current VaR in the system is broken down by collateral type. Gauntlet computes VaR (based on a measure of protocol insolvency) at the 95th percentile of our simulation runs.
  • Liquidations at Risk: conveys capital at risk due to liquidations when markets are under duress (i.e., Black Thursday). The current LaR in the system is broken down by collateral type. Gauntlet computes LaR (based on a measure of protocol liquidations) at the 95th percentile of our simulation runs.
  • Borrow Usage: - provides information about how aggressively depositors of collateral borrow against their supply. Defined on a per asset level as:

    Gauntlet aggregates this to a system level by taking a weighted sum of all the assets used as collateral.

Communications

  • Risk parameter change steps: forum post, community discussion, Snapshot, on-chain vote
  • Participation in weekly newsletters and community calls with breakdowns of parameter changes and any anomalies observed
  • Proactive alerting to give the community time to discuss risk-related issues
  • Market Downturn Risk Reviews to provide detailed retrospectives
  • Risk and Analytics Dashboards updated daily
  • Payloads shared and verified before submission for on-chain voting

Compensation Model

Gauntlet charges a service fee that seeks to be commensurate with the value we add to protocols. The fee will be a $2 million fixed fee for 12 months.

  • Total Compensation
    • 70% stablecoins (USDC, DAI, USDT)
    • 30% AAVE (at 30d VWAP)
  • Payment Schedule
    • 30% of the total compensation (stablecoins) deposited in a vault for the insolvency refund
    • The remaining compensation (stablecoins / AAVE) is streamed linearly over 1 year

Gauntlet has yet to sell any AAVE, but note that we may do so in the future for tax, operational, or other company requirements.

Next Steps

We welcome any feedback on this updated proposal. Please share any comments or feedback below. We are targeting to submit a Snapshot in the next few days given the extensive conversations we’ve had with stakeholders on determining these updates.

About Gauntlet

Gauntlet is a simulation platform for market risk management and protocol optimization. Our optimization work includes engagements with Compound, Maker, Synthetix, Immutable, BENQI, Venus, Moonwell, Ref Finance, and others.

13 Likes

Hi @Pauljlei,

Can you please help me with some context here. Why does Gauntlet use a price structure derived from the amount of debt on the platform versus a fixed USD value per time period ?

Let me share a few examples where this model is sub-optimal for Aave:

  • Liquidity Mining leads to excessive recursive usage of Aave that masks true adoption and market fit whilst bolstering debt and leading to short term revenue increase. Examples: Polygon, Avalanche and Optimism deployments.

  • eMode is similar to liquidity mining in the sense it enables recursive usage of Aave which inflates debt and is often incentivised by other communities building on Aave. The recursive stETH and ETH leverage loop will be enhanced by eMode on the Ethereum v3 deployment.

If Gauntlet derives its revenue from the amount of debt on Aave, then any introduction of Liquidity Mining, example: v2 to v3 migration, or the creation of any eMode will inflate Gauntlet’e Revenue. Furthermore, each DeFi integration that anyone brings to Aave, will drive revenue to Gauntlet.

For example, there are recursive products coming for stMATIC, MaticX and wMATIC that are highly likely to be incentivized by Lido, Stader, Polygon Foundation and the community developing the products, which are then incentivized on Balancer. Gauntlet will identify the debt across numerous Reserve, as whale wallets, and will benefit directly from debt/usage of Aave. If one Service Provide coordinates, brings incentivized integrations to Aave, which directly creates usage and revenue, then I think one Service Provider paid an annual amount and another receiving commission despite not actually being involved in the business development aspect is not in the best interest of Aave.

It is worth keeping in mind proactive risk management on these products/integrations is done at the design stage with the respective community. Gauntlet is not involved in the design phases of other communities products where most of the risks tracked by Gauntlet can be proactively mitigated. ie: progressively deleveraging due to pegged asset price divergence, reducing liquidity conditions and utilizing aggregators to rebalance leverage ratios rather than single DEX pool sourced liquidity.

I will assume GHO debt is excluded from Total Debt - this is an important part to clarify as GHO is 100% debt and $5B of GHO would net $5M to Gauntlet.

As the number of Aave integrations increases, the Total Borrow figure shall increase. When Gauntlet expands to include Polygon v3 in February 2023, this is a step change in Total Borrow, which is a step change in revenue to Gauntlet. Also likely to coincide with ongoing liquidity mining. Quoting $2.07M as the annual rate now and not sharing what the total price would be in March 2023 when 6 additional Aave deployment are generating Revenue for Gauntlet is a bit mis-leading. It is cheery picking the data that anchors everyone’s mindset towards the $2.07M figure.

I would encourage Gauntlet to express what the monthly charge to Aave will be with each additional Aave deployment being added to the service offering.

To full understand the actual cost of this proposal, someone must consider the following:

  • Number of Aave Deployments
    Expand the Service to include more markets and the cost to Aave goes up

  • Bull / Bear Market conditions
    Bull market lead to higher TVL, expanded LTV values, greater debt usually in stablecoins and therefore more Revenue to Gauntlet

  • v2 to v3 Migration
    If Aave elects to provide any incentives to accelerate the migration, this will likely inflate borrowings across the platform and drive revenue to Gauntlet.

  • eMode adoption leading to elevated debt levels
    The stETH and ETH recursive loop is just the start of what is possible with eMode. Depending on the success of other service providers, Gauntlet somewhat receives a free carry as most products built on Aave can be designed to proactively mitigate the risks tracked retrospective by Gauntlet once in production.

  • New aToken for BPTs
    The new aToken that enables BPTs to be integrated into Aave which will enable a lot of new recursive lending strategies to be built. Example: bb-a-USD as collateral with 400 bps of yield as collateral will enable the USDC, DAI and USDT Reserves utilization to increase until borrowing costs offset the incentive + swap fee yield. Such recursive strategies will generate a lot of revenue for Aave, that will partially flow to Gauntlet through the Total Debt element of the debt commission model.

The current bear market and partial coverage by Gauntlet anchors the stated price to the lower end of its potential and does not take into consideration the upside borrowing utilization from eModes or community initiatives like v2 to v3 migration such as Liquidity Mining. I personally would like to see Gauntlet with a flat fee around the $2M per year pricing level. This then leaves budget for Chaos Labs who has been very proactive and enthusiastic in supporting Aave, who didn’t stop supporting Aave when there was a speed bump in funding. If both risk providers are priced around $2M, then Aave may be able to consider a third provider who manages the Aave Portals risks if we think of the overall risk budget as sub $5M.

I would personally like to see Gauntlet align its proposal with other Service Providers and pivot to a Fixed USD value rather than a debt based commission model. More generally, I think this should be the standard that all Service Providers are priced in fixed annual values with a linear stream of rewards with pre-defined periodic review cycles.

The views above are my own and not reflective of any other entities or communities views.

8 Likes

The ACI’s position on this re-run proposal remains unchanged from the previous vote.

We still believe that Gauntlet is a valuable addition to the Aave protocol and that having an independent third-party team for risk management is a good thing. However, we continue to have concerns about the pricing model. As mentioned previously, we believe that the current model is not suitable and agree with @MatthewGraham’s comments on the matter. If a proposal with the same cost for the DAO was presented with a different pricing model, we would likely vote in favor of it.

Despite these concerns, we believe that fair work deserves fair pay, and acknowledge that Gauntlet has a proven track record with the Aave DAO. We believe that it is important to adopt long-term, sustainable, and predictable budgets with service providers, and hope that a suitable pricing model can be agreed upon in the future.

Our position broadly aligns with Matthew’s post on this topic, and we refer interested parties to his post for more information.

9 Likes

Thanks for the comments @MarcZeller @MatthewGraham. We still think that a variable-based pricing model is a better model for Aave, but we’re happy to move to a fixed price model of $2 million for the year. The proposal has been updated to reflect this.

5 Likes

thanks for your reply, expressing my full support for Gauntlet proposal.

6 Likes

Thank you, everyone, for your support. Given the upcoming holidays and extensive conversations we’ve had prior to posting this, Gauntlet has published the Snapshot vote below. Voting begins on 12/15/2022.

https://snapshot.org/#/aave.eth/proposal/0xd096f98237c642614fe154844c5037a85c1f287f3323c4b003a83bd3f4ea658a

6 Likes

Thanks for taking the time to create an updated proposal.

As expressed well above, we shared concerns about the variable pricing model - and are happy to see your team incorporate Marc and Matthew’s comments, demonstrating flexibility.

We believe Gauntlet is a worthwhile investment for the DAO and will be supportive.

5 Likes

The Snapshot has passed with 811K YAE votes. We thank everyone for their support and are excited to move forward with AIP here. Voting for AIP begins tomorrow.

6 Likes

Thanks everyone for the support and flexibility - our on-chain proposal has passed. We look forward to continuing to serve Aave with this expanded scope and will keep the community updated on our progress beginning in the new year.

5 Likes