Overview
A review of proposed changes for the Aave V3 Gnosis instance.
Onboard osGNO and create osGNO/GNO E-Mode
osGNO Analysis
osGNO is a GNO LST created by Stakewise. The token represents GNO staked in “Vaults” and earns yield from validators. osGNO can be permissionlessly minted against any Gnosis Chain node. Unlike traditional LSTs, whereby the associated receipt token represents the pooled underlying at a 1:1 rate, minting osGNO requires a user to be overcollateralized in staked GNO with respect to his osGNO, at a ltvPercent ”minting threshold” of 90%. The rationale behind this is to leverage the excess backing of staked GNO to protect holders against slashing and poor performance risks from permissionless nodes. Effectively, this implies that the associated stakers in Vaults are exposed only to the performance of their respective Vault’s validators, while external holders of osGNO benefit from this GNO-denominated slashing loss buffer. To this effect, while stakers can only mint osGNO worth up to 90% of their staked GNO, they still retain rewards on 100% of their stake.
Protocol Incentives
In addition to the autonomy presented at the node operator/vault level, the protocol effectively creates and maintains a competitive marketplace between respective vault operators through economic (dis)incentive alignment at the protocol level. In addition to siloed slashing risks within respective vaults, the protocol enshrines a “fair exchange rate,” as referenced in the PriceFeed contract, which represents the weighted average APY across all vaults with feePercent ≤ 15%, acting as the effective reward baseline for all osGNO in circulation in vault-standard fashion. In the event that a user delegates to underperforming vaults, stemming from operator MEV extraction, substantial operator fees or suboptimal infra, the underlying LTV of the associated osETH vault positions can scale accordingly, as the effective number of shares collateralizing the underlying staked GNO is no longer in line with the protocol.
External Redemptions
If the value of a user’s osGNO position reaches 91.5% of the staked GNO value, any osGNO holder can redeem for GNO held in the vault, totally ordered with respect to the LTV of the position. The amount redeemed is calculated using the following equation.
These third-party redemptions can only be conducted to bring a user’s health level back to 90%, minimizing the amount that stakers can lose, and are only profitable to perform under the assumption that the market price of osGNO is trading lower than the associated exchange rate, thereby implicitly aligning incentives to maintain protocol safety while explicitly contributing to peg reversion.
Liquidations
Furthermore, if the value of an osGNO position deviates further, past the enshrined liqThresholdPercent of 92% relative to the staked GNO, maintaining protocol solvency is no longer conditionally performed as a function of the negative market price deviation from the PriceFeed value, rather the position can be fully liquidated with a liqBonusPercent of 1% to the external actor.
Withdrawals
Burning osGNO and withdrawing staked GNO follows the underlying dynamics of the Gnosis exit queue, which, with a CHURN_LIMIT_QUOTIENT value of 2^12 as opposed to Ethereum’s 2^16 and 3.5x fewer validators, allows users to receive the underlying GNO exponentially faster than staked ETH, typically occurring in 24 hours.
Market Price Deviations
As a result of the mechanisms at play, we have observed periods where the asset was trading at a large premium relative to its exchange rate. In this sense, there exists an associated deterrent in capital efficiency such that arbitraging the upward deviation requires a user to adhere to the ltvPercent, capping the effective maximum upward deviation at ~1.11 osGNO/GNO, nearly akin to a CDP stablecoin such as LUSD. This effect, coupled with the relatively quick exit queue and redemption/liquidation mechanisms, makes it such that negative deviations will be short-lived, while positive deviations solely benefit the protocol.
The associated market dynamics overlayed with mint/burn events further exemplify this. Significant upward deviations lead to an implicit incentive to mint osGNO, as the effective APY realized will thus be higher. While an upward market price deviation can deter Stakewise redemptions and liquidations from occurring, the net accrual rate of the LTV is significantly reduced given by the rate difference between the lower-performing vault positions and the weighted average staking APY, thus we expect the market price to revert into a profitably liquidatable range within such a long timeframe. Moreover, as the LTV converges upward, the associated collateralizing stake relative to the total osGNO in circulation would thus be deteriorating, thereby resulting in the expected market price reacting accordingly.
Market Cap and Liquidity
The asset currently has a total supply of 18,804 osGNO ($5.2M) and one significant DEX liquidity pool — the osGNO-GNO pool on Balancer. While the total supply has fallen since mid-November, it is likely that an Aave listing would induce demand and cause growth in its supply.
LT, LTV, and LB
Given the asset’s somewhat limited liquidity on Gnosis, as well as its anticipated use case in leveraged yield generation strategies, we propose setting the asset’s non-E-Mode parameters such that the asset will not be used to borrow uncorrelated assets (similar to rsETH’s listing on Ethereum). In E-Mode, we concur with the proposed parameters of 90%, 92.5%, and 2.5% for LTV, LT, and Liquidation Penalty, respectively.
Given the overcollateralized nature of osGNO, which enables upward deviations under a 1.11 GNO market price, liquidating osGNO/GNO positions on Aave becomes increasingly profitable during events of upward deviations. Hence, we consider the proposed 2.5% Liquidation Bonus to be sufficient to maintain a competitive and profitable liquidation market.
Supply and Borrow Caps
We recommend setting the supply cap at 1x the liquidity available beneath the Liquidity Penalty of 2.5%. This leads to a recommendation of 4,750 osGNO. Given the novelty of the asset and the high upside deviation demonstrated, we do not recommend setting the supply cap at 2x as the Chaos Labs methodology suggests. However, given liquidations are unlikely given the setup, we are prepared to facilitate supply cap increases.
Oracle
We recommend using the GNO/USD oracle augmented with the exchange rate contained in Stakewise’s PriceFeed contract.
Specification
| Parameter | Value |
|---|---|
| Asset | osGNO |
| Isolation Mode | N/A |
| Borrowable | No |
| Collateral Enabled | Yes |
| Supply Cap | 4,750 |
| Borrow Cap | - |
| Debt Ceiling | - |
| LTV | 0.05% |
| LT | 0.10% |
| Liquidation Bonus | 7.5% |
| Liquidation Protocol Fee | 10% |
| Variable Base | - |
| Variable Slope1 | - |
| Variable Slope2 | - |
| Uoptimal | - |
| Reserve Factor | - |
| Stable Borrowing | Disabled |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowable in Isolation | No |
| Parameter | Value | Value |
|---|---|---|
| Asset | osGNO | GNO |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 90% | - |
| Liquidation Threshold | 92.5% | - |
| Liquidation Bonus | 2.50% | - |
CAPO Configuration
Following the methodology in this post, we recommend using a 14-day MINIMUM_SNAPSHOT_DELAY and a maxYearlyRatioGrowthPercent of 13.01%.
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 13.01% | monthly | 14 days |
Remove GNO from Isolation Mode
GNO is currently listed in isolation mode with a debt ceiling of $2M, 1.3M of which is utilized. It has an LTV of 48% and LT of 53%. At current price and supply levels, this would increase the borrowing power of the market from $2M to just over $10M. The primary considerations when implementing this change are volatility and liquidity. Regarding the former, the asset has been moderately volatile, with a 30-day daily annualized volatility of 80.46%, up slightly from 77.94% over the last 180 days. This volatility level does not present a barrier to removing the asset from isolation mode.
The asset’s liquidity on Gnosis has grown since September and only dropped after the recent price drop.
Given the significant growth of the asset’s liquidity and the major GNO suppliers maintaining positions with a health score of 1.3 or higher, the market’s liquidation risk is greatly reduced. Together, these four top positions represent nearly 92% of supply while posing little threat of liquidation in their current composition. Given these factors, we approve of removing GNO from isolation mode.
Specification
Remove GNO from isolation mode.
Lower Reserve Factor for EURe
EURe has demonstrated stable liquidity on Gnosis in recent months.
Additionally, EURe’s volatility relative to EUR has remained stable at 10.95%.
These factors indicate that the asset’s risk profile is sufficient to reduce its RF in line with other stablecoins. While doing so is expected to reduce Aave DAO revenue from the asset by roughly $35K/year given current usage, this adjustment can be effective in driving additional EURe supply thanks to the increase in supply rate.
Specification
| Asset | Chain | Current Reserve Factor | Rec. Reserve Factor |
|---|---|---|---|
| EURe | Gnosis | 20% | 10% |
Make sDAI Borrowable
As yield-bearing assets such as sDAI generally generate limited borrow demand and minimal revenue, while there isn’t a significant risk in making the asset borrowable, we do not recommend making sDAI borrowable.
Additionally, given the high concentration of supply positions within the sDAI market, enabling the asset as collateral would only be possible by maintaining a conservative UOptimal parameter.
We will continue to review the market and will adjust our recommendation when a valid usecase for borrowing sDAI will be present.
sDAI/EURe E-Mode
As discussed in a previous section, EURe has maintained a somewhat stable peg and liquidity, making it suitable for inclusion in E-Mode, albeit with more conservative parameters than those on other deployments, given its lower correlation to USD-denominated stablecoins.
While both sDAI and EURe have volatile liquidity at the 1% slippage level, their liquidity below the 5% slippage level has remained relatively stable over the past three months.
With all these factors in mind, we concur with the proposed parameters for the E-Mode, finding that the 5% Liquidation Penalty is sufficient to properly incentivize liquidators, and the 87.5% LT point provides a sufficient buffer from the bad debt accrual point at 95.2%.
Specification
| Parameter | Value | Value |
|---|---|---|
| Asset | sDAI | EURe |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 85% | 85% |
| Liquidation Threshold | 87.5% | 87.5% |
| Liquidation Bonus | 5% | 5% |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
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