It helps ameliorate the ongoing situation with Aave’s exposure to Crv and reduces the risk of possible bad debt to the protocol.
Facilities the decentralization and adoption of GHO
Aave gets a say in future Crv voting to advance it’s own agenda similar to that at Balancer
Crv will be bought at a discount and subject to vesting
Further diversification of the treasury
the negatives are:
Increasing Crv exposure does present a risk
There is no guarantee Michael Egorov will reduce his Aave position although if the current AIP to set LTV to 0 passes this is negated somewhat (even if he posses the skill to potentially circumvent this)
Weighing both up and with the time sensitive nature of this proposal I’m in favour of moving straight to an AIP and put it to the community subject to the usual Chaos/Gauntlet inputs.
Thanks @MarcZeller for bringing such a proposal forward and for engaging in conversations to bring this forward.
The only benefit of this proposal is the DAO acquiring and locking CRV for veCRV (at a discount rate) which as mentioned will help mobilise incentives for GHO liquidity, which will lead to more GHO borrowed & more revenue for the DAO.
In no way does this proposal help reduce the risk of 0x7a16ff8270133f063aab6c9977183d9e72835428 position and should not be seen by the community as doing so.
Currently, there exists a potential risk of a black swan event in the DeFi sector. Apart from Curve, AAVE stands as the second most exposed protocol. The recent Curve crisis resulted in the 5th highest Tether volume in a single day, surpassing even the Celsius collapse, thus underscoring the significance of the matter. It is essential not to underestimate the potential consequences. If Curve’s value falls below $0.37, we could be left with 300M CRV tokens devoid of liquidity for selling. The only plausible path to recovery in such a situation is if the CRV price increases, which, given the circumstances, is doubtful.
Additionally, BTC currently exhibits notably very low volatility and appears to be precariously positioned, potentially exacerbating the situation if its value declines. A cascade of adverse effects could unfold if this loan undergoes liquidation, making this a genuine black swan scenario requiring a meticulous and professional approach.
In general, the sole advantage of this proposal lies in its potential to reduce the likelihood of a black swan event in the entire DeFi ecosystem. However, it is important to recognize that AAVE would become even more exposed should such an event transpire.
In my view, prioritizing cash preservation should be of utmost importance in these circumstances, rather than further exposing ourselves to unnecessary risks with limited potential upside. I propose exploring the possibility of seeking OTC investors to offload the CRV loan in case of liquidation, thereby avoiding additional exposure.
Furthermore, it is crucial to consider whether we can trust individuals who take imprudent risks and use the funds to acquire luxury properties. Additionally, the decision to provide such a substantial loan without adequate liquidity appears questionable.
Despite that we partially agree with your view @lmihaylov ; it is important to understand that we are in a situation that is too late to avoid the damage; now it’s time to control it, and by buying CRV at a discount and forcing the user to pay his debts is much more pleasant than having a huge bad debt on our shoulders. The question we should ask ourselves is how can we prevent another CRV scenario in the future. How did we allow to have soft parameters for v2 and not a proper risk management team behind it? Is it possible to automate some of these parameters by market conditions?
We should not blame the user, he played his cards with the parameters that the design allowed it; it’s our own fault. Tradfi world learnt this hard lesson long
time ago, lets do it better.
“Curve wars” are a stupid and unsustainable ponzi, and the goal of increasing GHO liquidity would be much better and more sustainably achieved by the DAO itself creating a Uniswap v3 position, or just using a PSM.
Additionally, it’s not clear to me that GHO liquidity is even particularly low, relative to its market cap, so I believe that this proposal is addressing an issue that does not need to be solved.
I would like to ask a question: is goal of this proposal of having more yield exposure for GHO holders to yield, or for AAVE to have a role in “save the current DeFi situation” because Curve is too big to fail?
I would assume is both. And tbh i don’t condemn neither the former nor the latter.
But if we are also opening the can of using a portion of treasury for productive assets to have yield and liquidity for GHO, I think there are also alternatives that should be explored, as addendum to this, for 1) creating a sustainable economic support model for GHO 2) having a robust source of yield that is not too much concentrated into single assets.
RE: it is important to understand that we are in a situation that is too late to avoid the damage; now it’s time to control it, and by buying CRV at a discount and forcing the user to pay his debts is much more pleasant than having a huge bad debt on our shoulders
The pivotal question, as you’ve pointed out, is whether the investment of 2 M would bring about a significant difference. If there is a tangible positive impact, then this approach appears viable. However, if the potential gain does not justify the additional risk, it might not be a prudent decision. Leaving the market to decide the course of action could be a more reasonable approach. Over-managing risk in this manner might dissuade potential investors from engaging with AAVE as an additional downside.
RE: The question we should ask ourselves is how can we prevent another CRV scenario in the future. How did we allow to have soft parameters for v2 and not a proper risk management team behind it? Is it possible to automate some of these parameters by market conditions?
It seems that partial automation could be achieved through implementing a liquidity parameter. This would help in making dynamic adjustments based on the market’s liquidity conditions. Such an approach could enhance risk management and foster a more secure ecosystem for AAVE moving forward.
While CRV is a leading project, it’s important to not conflate the motivation:
This is not the reason – nor is it healthy to anchor this proposal on this position / person. The reason Aave can “support” (aka acquire at a lower price) is that CRV got hacked and is discounted.
While it’s important to maintain strong relationships and be good actors in this space, I’m not sure this is best to entirely guide our treasury strategy during times of volatility:
My personal opinion is to optimize for longevity and create treasury diversity beyond digital assets. RWA exposure, debt, etc – I’m excited for proposals and teams who are starting to think about this.
Stablecoins are a great opportunity to do that – and would rather see them used this way.
I’d be more supportive of swapping ARB (or a non-stable asset) for CRV in this instance.
two birds one stone. 2M USDT is not much on a 55M debt and definitely on itself doesn’t change much except sending a signal of support.
on the other side, I’m personally convinced that 6 months from now, the CRV value will be either 0/a few cents OR much higher than the price of the current proposal.
This strategic acquisition allows diversification from balancer and helps GHO that is the strategic focus for the Aave DAO now.
Every investment has a conviction part.
Sorry, I didn’t mean to say that as an offense, it’s just that this approach seems very anti-DeFi to me .
Let’s take a step back. Aave is supposed to be a decentralized and impartial lending protocol. What happened here is that a user took too much debt which he’s now unable to repay. If Aave was really impartial now what should happen is that the user should be liquidated as any other user. Instead this proposal is suggesting to use treasury USDT to partially bailout the user.
But let’s put ideal aside and think for a second if this can actually help improve the current situation from a risk-reward perspective. The real issue for Aave is that according to the current position, in case of a liquidation the protocol would incur in bad debt if CRV price dropped below $0.21. This is the critical price under which we don’t want CRV to drop. This proposal goes in the direction of repaying the user debt, but it does so by acquiring CRV at $0.40, a price which is almost 2x the critical price. This wouldn’t reduce risk for Aave, but instead it would increase risk by increasing exposure to Curve success.
If Aave really wanted to protect the interest of its stakeholders and its lenders, the best strategy to use 2M USDT would be to place a limit order for CRV at $0.21 in order to buy it at a much lower price then what is currently proposed with this OTC trade. The possible outcomes would be:
If the price never drops to $0.21 then it is all good, the protocol doesn’t accrue any bad debt due to the liquidation!
If the price drops below $0.21 then the CRV position has been liquidated and Aave has occurred in bad debt, but at least we got CRV at a much lower price than $0.40…
Buying CRV at $0.40 just makes no sense considering there would be other viable strategies.
I’m not saying we should follow this strategy, I’m just saying that if we really wanted to do an USDT->CRV trade, then this would be the better way to do it from a risk-reward perspective.
One thing can live with the other; using 2M USDT is not a big deal for the treasury and at the same time, you are free to propose using other funds to acquire RWA (like what Maker is doing with its treasury). I feel the same way as you, I’m glad that we are moving GHO away from Balancer and building liquidity on top of Curve is the best choice, imho. Having 2M USDT - CRV at our disposal to boost GHO is a great idea. I would like to add that we prefer to swap CRV for sdCRV, instead of locking CRV to get veCRV.
Personally, I care much less about the efficiency of veCRV going forward.
I’d say the main value this proposal provides is reducing the risk of the Aave protocol taking on a meaningful amount of bad debt, which would hurt Aave’s brand and treasury holdings much more than the cost of buying these tokens now.
Even though I’m biased towards Balancer I think the purpose of this proposal is great, we should all help each other in times of distress like these.
I’d like to point out is that Aave has historically been the #1 focus for Balancer yield bearing liquidity and I’d personally like this to continue.
For example Balancer has intentionally not launched a stablecoin (like crvUSD) as we intend to remain impartial and focus on our core competence: being a powerful, flexible and capital efficient AMM, while collaborating with lending protocols (mainly Aave) to offer yield bearing pools to LPs.
I’m curious to hear why you @fig and @ApuMallku think moving away from Balancer is a good thing, we are always open to feedback to improve wherever possible.
Thanks for showing up, Fernando.
I am glad that we are expanding our liquidity venues if we can be part of the “Curve Wars” by having an allocation of CRV. I was not implying that we should encourage the removal of liquidity from Balancer towards Curve.
Personally, I don’t believe Curve - or any protocol that relies purely on inflation for TVL - will be a major component of DeFi as it matures, as the incentive structure is not sustainable. In short Curve is mostly a Ponzi and all Ponzis tend to collapse sooner or later. I’d rather not see AAVE lose out in the eventual collapse of Curve.
In my view it should be a priority of the AAVE DAO to seek to make GHO a staple of DeFI long after Curve is gone. So while there might be some short-term benefits of buying liquidity for GHO early on, a successfull GHO implementation will be able to attract liquidity and adoption on its own. I don’t believe the AAVE DAO is in a hurry to accelerate GHO adoption - it’s interest rate in itself is very attractive vs. other alternatives and what is already being worked on with Balancer was deemed enough to bootstrap early liquidity in previous proposals.
Also… @MarcZeller I’d like to point out there could be a slight conflict of interest in this proposal as we’re transfering risk from current stakers in the AAVE Safety Module (such as yourself) to the overall protocol. So it’s possible there might be a bias in the proposal to avoid being personally slashed, despite the event being net neutral to the AAVE protocol. I’d urge to assess the impact of bad debt not only from the perspective of stakers but also from overall health of the protocol - maybe it would be good for everyone to see that the AAVE protocol work as intended, even under great stress!