Chaos Risk Analysis
Alongside the benefits of listing fUSDC discussed in the initial TEMP-CHECK and above, it is important to highlight the risks associated with listing fUSDC as collateral on Aave.
Given the fact that fUSDC is not tradeable, liquidations rely on the availability of USDC liquidity on the Flux protocol. The availability of liquidity could be compromised due to any of the following risks materializing:
- Exposure to OUSG - Since USDC on Flux is borrowed against OUSG collateral, Aave is exposed to the risks associated with this “permissioned” asset, including Smart Contract Risk, Centralization Risk, and any unexpected issues regarding the underlying bond, which could influence the stability and reliability of OUSG as collateral.
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Exposure to Default Risk of Flux Finance Protocol:
By listing fUSDC as collateral on Aave, there is an inherent risk of default by the Flux Finance protocol, as this token is a receipt for the underlying assets locked in the Flux protocol.
Lack of Historical Data:
Flux Finance and OUSG are relatively nascent (the first transaction of this token on Ethereum was on 01/26/23 - https://etherscan.io/token/0x1b19c19393e2d034d8ff31ff34c81252fcbbee92), and the absence of historical data should be noted. The protocol and its governance are relatively untested, making it challenging to predict the community’s response to unforeseen events or significant market shifts. The lack of a track record increases the overall risk and ability to extract quality signals on the overall robustness of the platform. According to the Aave V3 Risk documentation, this would yield a D- rating on the time axis and low grades across other metrics.
Parameter recommendations
Given the above, if the community decides to onboard fUSDC as a collateral asset, we recommend initially listing the asset in isolation mode to bound protocol risk exposure.
As fUSDC can be redeemed for USDC, we support the recommendations to match the LTV, LT, LB, RF, LPF, and IR curve parameters to those of USDC.
We do note that there is a pending Chaos proposal to increase the LT and LTV of USDC on V3 Ethereum that, if passed, would require updating this proposal.
fUSDC volatility vs. USDC volatility showing strong correlation between the asset prices
Supply Cap
For the supply cap, as fUSDC is redeemable only through the Flux Finance USDC market, meaning that to support liquidations on Aave, there needs to be enough liquid USDC in Flux Finance to redeem the fUSDC that is being used as collateral on Aave. As the current USDC liquidity on Flux Finance is ~$2.22M, we suggest setting the initial supply cap at 2X the amount of liquidity available - ~$4.5M = ~220M fUSDC. This is a prudent approach that allows for half of the total supply to be liquidated at once. Chaos Labs will continue to monitor the available liquidity on Flux Finance and the positions on AAVE V3 on Ethereum to update these recommendations when needed.
Parameter Recommendations:
| Parameter | Value |
|---|---|
| Isolation Mode | Yes |
| Borrowable | No |
| Collateral Enabled | Yes |
| Supply Cap | 220M (~$4.45M) |
| Borrow Cap | N/A |
| Debt Ceiling | $1M |
| LTV | 74% (77%*) |
| LT | 76% (79%*) |
| Liquidation Bonus | 4.5% |
| Liquidation Protocol Fee | 20% |
| Variable Base | 0.00% |
| Variable Slope1 | 4.00% |
| Variable Slope2 | 60.00% |
| Uoptimal | 90.00% |
| Reserve Factor | 10.00% |
| Stable Borrowing | Disabled |
*LT and LTV will be updated according to the outcome of the following proposal