Overview
Chaos Labs supports listing FRAX in Isolation Mode as part of the V2 to V3 migration plan and increasing the offering of the Aave protocol. As explained in the migration plan post, FRAX maintains its peg reasonably, and given a fair market cap of over $1B and sufficient liquidity, we recommend listing it on Aave V3 on Ethereum in isolation mode.
Liquidity and Market Cap
When analyzing market cap and trading volumes of assets for listing, we look at data from the past 180 days. The average market cap of FRAX over the past 180 days was ~$1B, and the average daily trading volume was ~$15M (CeFi & DeFi).
Liquidation Threshold
Analyzing FRAX price volatility over the past, we observed daily annualized volatility of 4.69% and 30-day annualized volatility of 1.04%.
Considering this volatility and the history of FRAX on other networks, we recommend an LT of 75%.
We recommend listing FRAX as borrowable as we do not observe a significant risk to the protocol by allowing to borrow FRAX, as long as it is bound by a well-defined cap.
Debt Ceiling
Following Chaos Labs’ Isolation Mode Methodology, we recommend an initial debt ceiling of $10M. Under the methodology for Isolation Mode, we consider two levels of probabilities for extreme price drops - Medium-High and High. We estimate the probability of an extreme price drop for FRAX as Medium-High. Given this debt ceiling, we do not identify a profitable attack vector under the current liquidity levels.
Supply Cap, Borrow Cap, and Liquidation Bonus
When evaluating the initial supply caps for migrated assets from Aave V2 Market, we carefully analyze the current supply of the asset on V2 so that we can accommodate it on V3. We then ensure that this amount is aligned with the current liquidity on-chain.
Given the current on-chain liquidity and supply on V2 (2.71M), we recommend an initial supply cap of 15M FRAX, and a borrow cap of 12M FRAX.
Given the concentrated liquidity of FRAX we recommend an initial 6% Liquidation Bonus.
Recommendations
For the Reserve Factor, Liquidation Protocol Fee, and Interest Rate curves, we recommend aligning the parameters to the other stablecoins currently on Ethereum V3.
Following the above analysis, we recommend listing FRAX with the following parameter settings:
| Parameter | Value |
|---|---|
| Isolation Mode | Yes |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap (FRAX) | 15M |
| Borrow Cap (FRAX) | 12M |
| Debt Ceiling | $10M |
| LTV | 70.00% |
| LT | 75.00% |
| Liquidation Bonus | 6.00% |
| Liquidation Protocol Fee | 10.00% |
| Variable Base | 0.00% |
| Variable Slope1 | 4.00% |
| Variable Slope2 | 75.00% |
| Uoptimal | 80.00% |
| Reserve Factor | 10.00% |
| Stable Borrowing | Disabled |
| Flahloanable | Yes |
| Siloed Borrowing | No |
| Borrowed in Isolation | No |