Gauntlet Initial Risk Analysis - Aave V3 on GnosisChain
Summary
Gauntlet previously provided initial risk recommendations for Aave V3 on Base, zkSync Era, and BNB.
To formulate initial risk parameter recommendations on Aave V3 GnosisChain we use market data to adjust our previous Aave V3 recommendations.
Parameterizing new markets presents a challenge due to the lack of data on which to train simulation models. For this initial analysis, we assume that asset behavior on GnosisChain resembles that on comparable Aave V3 chains.
The highest risk to Aave on GnosisChain lies in limited wETH liquidity against USD stablecoins.
- The majority of liquidity on GnosisChain exists on Balancer between USDC/wxDAI and wETH/wstETH/GNO, with little liquidity connecting stable and non-stable assets. The primary pools that facilitate swaps between stables and nonstables is the wstETH-staBAL ($3.9m TVL) pool on Balancer, and the GNO-xDAI ($500k) on Honeyswap.
- Limited local liquidity on GnosisChain constrains the size of liquidations that can occur without distorting local market prices substantially from the benchmarks provided by external price oracles. If these distortions occur, liquidators may have to wait until cross-chain arbitrageurs stabilize prices for liquidations to be profitable. Moreover, in the event of market downturn, inability to facilitate atomic liquidation arbitrage at sufficient size may make liquidation too slow for unhealthy positions, which increases the risk of bad debt.
Accordingly, we recommend adopting conservative initial parameters based on our analysis.
Recommended Initial Parameters
We recommend proceeding with the following initial parameters for wETH, wstETH, GNO, USDC, wxDAI, and EURe on Aave V3 GnosisChain. In particular -
- Given the liquidity constraints between wETH/wstETH/GNO and USD stablecoins, we recommend reducing caps for stablecoins, GNO, and wETH and lowering LT for wETH and wstETH.
- We recommend increasing wstETH supply cap to greater facilitate recursive LST strategies.
- We recommend against listing GNO in isolation mode to allow for wETH borrowing, since isolation mode only allows for stablecoin borrowing. GNO-wETH liquidity is much stronger than GNO - USD stablecoin liquidity, and GNO is more correlated with wETH.
- With wETH ↔ USD stablecoin liquidity low, we recommend setting Uopt at 80% for wETH to provide more buffer for liquidations.
| Risk Parameter | wETH | wstETH | GNO | USDC | wxDAI | EURe |
|---|---|---|---|---|---|---|
| Isolation Mode | NO | NO | NO | NO | NO | NO |
| Enable Borrow | YES | YES | NO | YES | YES | YES |
| Borrowable in Isolation | NO | NO | NO | YES | YES | NO |
| Enable Collateral | YES | YES | YES | YES | YES | NO |
| Emode Category | ETH | ETH | NO | NO | NO | NO |
| Loan To Value | 71% | 71% | 31% | 77% | 77% | N/A |
| Liquidation Threshold | 76% | 76% | 36% | 80% | 80% | N/A |
| Liquidation Bonus | 6% | 6% | 10% | 5% | 5% | N/A |
| Liquidation Protocol Fee | 10% | 10% | 10% | 20% | 20% | 20% |
| Reserve Factor | 15% | 15% | N/A | 10% | 10% | 15% |
| Supply Cap | 4,000 wETH | 4,000 wstETH | 30,000 GNO | 1MM USDC | 1.5MM xDAI | 0.5MM EURe |
| Borrow Cap | 3,500 wETH | 400 wstETH | N/A | 1MM USDC | 1.5MM xDAI | 0.5MM EURe |
| Isolation Mode Debt Ceiling | N/A | N/A | N/A | N/A | N/A | N/A |
| Stable Borrowing | NO | NO | NO | NO | NO | NO |
| uOptimal | 80% | 45% | N/A | 90% | 90% | 90% |
| Base | 0% | 0% | N/A | 0% | 0% | 0% |
| Slope1 | 3.3% | 7% | N/A | 4% | 4% | 4% |
| Slope2 | 80% | 300% | N/A | 75% | 75% | 75% |
Furthermore, we recommend the following parameters for the ETH eMode pool:
| Parameter | ETH eMode Pool |
|---|---|
| Liquidation Threshold (LT) | 93% |
| Loan-To-Value (LTV) | 90% |
| Liquidation Bonus (LB) | 1% |
Given that Chainlink offers an exchange rate price feed between wstETH and ETH, we recommend implementing CSPA for wstETH.
Appendix
We invite the community to read more of our thoughts on the liquidity landscape for Gnosis Chain, as well as our consideration for the parameters below.
Liquidity Landscape and Asset Overview
On GnosisChain, Balancer v2 ranks as the top DEX by TVL ($32.57MM), followed by Curve in second place ($10.48MM), Honeyswap in third ($4.79MM), and Sushi in fourth ($2.59MM).
GnosisChain liquidity saw a temporary drop in liquidity following the Balancer V2 pool hack in late August 2023, but has since recovered.
Balancer also suffered a frontend phishing attack in September 2023 which prevented users from using the Balancer UI.
Curve’s daily trading volume on Gnosis averages between $20-100k, with the majority concentrated in two pools: 3pool (wxDAI/USDC/USDT) ($47k 24hr volume, 2023-09-18), and eureusd (EURe+3pool) ($27k 24hr volume, 2023-09-18).
Additional wxDAI liquidity exists on Balancer’s wxDAI/USDC/USDT ($5MM TVL) and wETH/BAL/GNO/wxDAI ($400k TVL) pools.
Additional EURe liquidity exists on Balancer’s agEUR/EURe pool ($800k TVL), staBAL3/EURe pool ($3MM TVL), and staBAL3/wstETH pool ($3MM TVL).
We compile liquidity data from 12 different DEX sources on GnosisChain using 1inch to evaluate aggregate liquidity and observe slippage on the trades below.
| Symbol | 25% Depth (USD) | 2% Depth (USD) |
|---|---|---|
| wETH<>USDC | $68k | $3.4k |
| wstETH<>USDC | $583k | $55k |
| GNO<>USDC | $114k | $10k |
| USDC<>GNO | $114k | $10k |
| wxDAI<>USDC | $4.4MM | $3MM |
| EURe<>USDC | $3.2MM | $897k |
wETH liquidity is weak against USD stablecoins on GnosisChain but wstETH liquidity is relatively strong due to Balancer’s staBAL3/wstETH pool with around $3.8MM TVL.
The majority of liquidity for GNO exists on Balancer via the wstETH/GNO and wETH/wstETH pools, each with around $9MM TVL.
Below is a summary of the assets on GnosisChain.
| Symbol | TVL | # Txns | Total Wallets | Net Top 5 Wallets |
|---|---|---|---|---|
| GNO | $54,421,829 | 1,479,426 | 27,308 | $40,701,404 (75%) |
| wETH | $24,031,843 | 4,006,106 | 33,740 | $18,957,044 (78%) |
| wstETH | $19,372,746 | 3,215 | 28,771 | $19,261,178 (99%) |
| wxDAI | $14,295,584 | 13,863,996 | 131 | $8,377,899 (59%) |
| USDC | $9,682,685 | 28,985,467 | 60,354 | $5,225,297 (54%) |
| EURe | $6,767,171 | 88,916 | 8,181 | $5,930,241 (88%) |
Parameters
Enable Borrow
We recommend enabling borrowing for wETH, wstETH, USDC, wxDAI, and EURe with conservative borrow caps to help mitigate risk.
At this time, we do not recommend enabling GNO borrows because of limited stablecoin to non-stablecoin liquidity.
Enable Collateral
We recommend all assets but EURe to be used as collateral due to EURe’s relatively smaller TVL and depeg risk.
Liquidation Threshold and Loan to Value
We generally recommend more conservative LT/LTV parameters for these assets relative to other chains, due to the liquidity conisderations discussed previously.
GNO, the native token of the GnosisChain, is the second largest token by market cap but lacks significant on-chain liquidity, with a 25% depth of ~$100k to USD stablecoins. GNO has a market cap of $200MM, placing it below the other DeFi governance tokens listed on Aave V3 Ethereum like UNI, LINK, AAVE, SNX, MKR, and SUSHI.
Isolation Mode
Given that GNO ↔ wETH liquidity is significantly stronger than GNO ↔ USD stablecoin liquidity, and GNO - wETH are more correlated than GNO - USD stablecoin, wETH borrowing is less risky than stablecoin borrowing against GNO. As a result, we recommend against listing GNO in isolation mode to allow for wETH borrowing, since isolation mode only allows for stablecoin borrowing. We threshold the risk via the GNO supply cap.
Liquidation Bonus (LB)
Gauntlet recommends setting LB to 5% for stablecoin assets (USDC, wxDAI, EURe), 6% for wstETH, 6% for WETH, and 10% for GNO.
Liquidation Protocol Fee (LPF)
Gauntlet recommends that stablecoins have 20% LPF and non-stablecoins have 10% LPF to allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience.
LPF is important to help build reserves over time to counter potential insolvencies but it is valuable to ensure liquidators are not disincentivized due to a high relative LPF. Non-stablecoins are more volatile and may incur more slippage during liquidations. To ensure liquidator incentives remain robust, we recommend a lower LPF for non-stablecoins.
Interest Rate Curves
We recommend setting the interest rate curves for existing assets following the same values they have on other chains, as guided by Gauntlet’s Interest Rate Curve Changes for Aave V3 Markets. The recommended interest rates are aligned with Aave V3 parameter presets.
To ensure ample wETH liquidity for timely liquidations, we recommend an 80% Optimal Utilisation Ratio.
Reserve Factor
We recommend using the same Reserve Factors of similar assets on other chains for wETH, wstETH, USDC, wxDAI, and EURe.
eMode
We recommend the ETH eMode pools start with the same parameters as Ethereum mainnet and Optimism: 93% LT, 90% LTV, and 1% LB.
We recommend excluding USDC, wxDAI, and EURe from Stablecoin eMode to mitigate protocol risk due to these assets either lacking mean-reversion, not showing stable correlation, or not being fully pegged and collateralized by USD.
Borrowable in Isolation
We recommend enabling only USDC and wxDAI borrowing in Isolation Mode because they are the stablecoins with the highest liquidity on Gnosis.
Borrow and Supply Caps
As described above, given the liquidity constraints between wETH/wstETH/GNO and USD stablecoins, we recommend reducing caps for USD stablecoins and GNO.
Ultimately, given the novel risk factors involved in the Aave V3 deployment on GnosisChain, it may be prudent to ramp up to maximum potential exposure by starting with lower initial supply caps to limit maximum protocol losses.