[ARC] Updated: Gauntlet <> Aave Renewal

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.