[ARFC] Add SNX to Ethereum v3

[Llamaxyz]

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Title: [ARFC] Add SNX to Ethereum v3
Author: @Llamaxyz - DeFi_Consulting (@matthewgraham), ACI (@MarcZeller) and 3SE
Dated: 2023-02-18

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Summary

This proposal presents Aave the opportunity to onboard SNX to the Ethereum v3 Liquidity Pool.

Abstract

Synthetix is financial primitive enabling the creation of synthetic assets, offering unique derivatives and exposure to real-world assets on the blockchain. SNX was originally listed on Aave v1 and included on Aave v2 when it was launched in late 2020.

Adding SNX to Aave v3 will enable users to migrate from v2 to v3, $10.5m, and enable Aave to continue generating SNX nominated revenue. SNX is not currently listed on either the USDC or ETH Compound v3 liquidity market.

This ARFC is a joint effort with ACI and 3SE to allow a selection of v2 listed assets to be onboarded on V3 via the governance process. Subject to a favourable Snapshot vote, Llama will submit an AIP for voting.

Motivation

Synthetics has $435m of TVL and is ranked 25 on the Defi Llama dashboard. Aave has generated over $205,000 in revenue from users who borrow SNX on Aave v2. SNX is one of the few non stable coin tokens with significant borrowing demand.

The risk parameters provided here within are from Gauntlet’s original Aave v3 initial assets listings and configurations forum thread. These parameters are to be revised by Gauntlet and feedback will be incorporated before progressing to a Snapshot vote.

The interest rate provided in the proposal mirrors the v2 deployment with exception of the parameters specific to stable interest rates. The stable rates proposed are the somewhat generic listing rates as stable borrowing is disabled. However, if stable borrowing was enabled, the suggested parameters are suitable and don’t create any undesirable dynamics between stable and variable rates.

We note that this proposal is to be reviewed by Gauntlet, with feedback incorporated, prior to progressing to Snapshot.

Specification

Ticker: SNX

Contract Address: 0xc011a73ee8576fb46f5e1c5751ca3b9fe0af2a6f

Risk Parameter	Value
Isolation Mode	YES
Enable Borrow	YES
Enable Collateral	YES
Loan To Value	49.00%
Liquidation Threshold	65.00%
Liquidation Bonus	8.50%
Reserve Factor	35.00%
Liquidation Protocol Fee	10.00%
Borrow Cap	1,100,000 units
Supply Cap	2,000,000 units
Debt Ceiling	$2,500,000
Variable Base	3.00%
Variable Slope1	15.00%
Variable Slope2	100.00%
Uoptimal	80.00%
Stable Borrowing	Disabled
Stable Slope1	15.00%
Stable Slope2	100.00%
Base Stable Rate Offset	3.00%
Stable Rate Excess Offset	5.00%
Optimal Stable To Total Debt Ratio	20.00%

Note: Stable borrowing is disabled, however parameters are provided in case stable borrowing is enabled at a later date without amending any parameters.

Copyright

Copyright and related rights waived via CCO

[MarcZeller]

Hello, and thank you, @Llamaxyz, for submitting these proposals to the forum.

Since the proposals are presented in separate threads to allow governance granularity, the ACI’s response will be variations of this current post on each thread.

The ACI believes it’s better to leave GHO out of isolation mode in the early days and not allow some assets to be collateral to mint it.

With this in mind,

the ACI is supportive of this proposal if GHO is not part of isolation mode.

[ChaosLabs]

Chaos Labs is looking into the initial parameters listed on this post and will collaborate with Gauntlet to provide updated parameter recommendations per our joint New Asset Listing Framework.

[MattLosquadro]

Thanks for setting up this proposal @Llamaxyz! We (SNX Ambassadors) would love to see SNX on V3!

[ChaosLabs]

Gauntlet and Chaos Labs have collaborated and shared our independent analyses for the listing of SNX on V3 Ethereum.

The main differences between the analyses were the supply cap, borrow cap, debt ceiling, and LB recommendations. Chaos Labs recommended a more conservative approach for setting caps at launch, with the final recommendation being a middle ground between the proposals. This was done after analyzing the usage of SNX on Ethereum V2 and to allow more room for growth and migration from V2. Additionally, the recommendation for the debt ceiling is the lower between the proposals, as this can be increased at a later stage. Finally, Gauntlet recommended a slightly higher liquidation bonus which was adopted for the launch.

Below you can find a joint recommendation with the initial parameters followed by the analysis of each party.

SNX Parameter Recommendations:

Risk Parameter	Value
Isolation Mode	YES
Enable Borrow	YES
Enable Collateral	YES
Loan To Value	49.00%
Liquidation Threshold	65.00%
Liquidation Bonus	8.5%
Reserve Factor	35.00%
Liquidation Protocol Fee	10.00%
Borrow Cap	1,100,000
Supply Cap	2,000,000
Debt Ceiling	$2,500,000
Variable Base	3.00%
Variable Slope1	15.00%
Variable Slope2	100.00%
Uoptimal	80.00%
Stable Borrowing	Disabled
Stable Slope1	15.00%
Stable Slope2	100.00%
Base Stable Rate Offset	3.00%
Stable Rate Excess Offset	5.00%
Optimal Stable To Total Debt Ratio	20.00%

Gauntlet Analysis

Gauntlet recommends making the following changes to the initial Aave V3 ETH recs for SNX:

Syntax	Description
Liquidation Bonus	8.5%
Borrow Cap	3,600k
Debt Ceiling	6,600k

Given that SNX will be in isolation mode and have a debt ceiling, Gauntlet supports the LTV and liquidation threshold increase. However, a liquidation bonus decrease from the proposed parameters would still properly incentivize liquidators. The liquidation bonus decrease from the original recs will keep the effective liquidation incentive closer to the Aave V2 value. This recommendation is made considering the strict risk decrease for the Aave V3 listing compared to Aave V2. In addition, the borrow cap seems to be a typo. We believe that the correct value would be 3,600k in this situation. In addition, our analysis shows that the proposed debt ceiling would initially be set too high. For the initial parameterization, a more conservative setting of 6.6M, which can be calculated from the supply cap, liquidation threshold, and current price, would be prudent. We can revisit the cap as the market matures.

Chaos Labs Analysis

Overview

Chaos Labs supports listing SNX in Isolation Mode as part of an overarching strategy to increase the offering of AAVE protocol with more volatile assets. As a low market cap asset, SNX is susceptible to price manipulation, so listing it with an appropriate debt ceiling is crucial to prevent a profitable pump attack.

Liquidity and Market Cap

When analyzing market cap and trading volumes of assets for listing, we are looking at the past 180 days, especially in light of the recent market turbulence. The average market cap of SNX over the past 180 days was $565M, and the average daily trading volume was $46M (CeFi & DeFi). The market cap is relatively low but reasonable for listing in isolation mode. While the trading volumes are not high, they are reasonable for the asset’s market cap and can be addressed by the supply caps, debt ceiling, and borrow caps.

Liquidation Threshold

Analyzing SNX price volatility over the past year, we see that over the past year, we observed daily annualized volatility of 121% and 30-day annualized volatility of 101%. Considering this volatility, we support the suggested initial LT of 65%.

We support listing SNX as borrowable under reasonable limits of supply cap, as we do not observe a significant risk to the protocol by allowing to borrow SNX, as long as it is bound by a well-defined cap.

Debt Ceiling

Following Chaos Labs’ Isolation Mode Methodology, which we will publish shortly, we recommend an initial debt ceiling of $2.5M. Under the methodology for Isolation Mode, we consider two levels of probabilities for extreme price drops - Medium-High and High. We estimate SNX probability for an extreme price drop 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

Following Chaos Labs’ approach to initial supply caps, as introduced with the Metis deployment recommendations, we propose setting the Supply Cap at 2X the liquidity available under the Liquidation Penalty price impact. We recommend a 7.5% Liquidation Bonus and a derived supply cap of 720,000 SNX and a borrow cap of 400,000 SNX.

Recommendations

We support the recommendations in the post for the Reserve Factor, Liquidation Protocol Fee, and Interest Rate curves.

Following the above analysis, we recommend listing SNX with the following parameter settings:

Isolation Mode	Enable Borrow	Enable Collateral	LTV	LT	Liquidation Bonus	Reserve Factor	LPF	Supply Cap	Borrow Cap	Debt Ceiling
Yes	Yes	Yes	49%	65%	7.5%	35%	0.1	720K	400K	$2.5M

[Llamaxyz]

Hi Everyone,

Llama has created a Snapshot that incorporates the SNX parameters as suggested by Chaos Labs and Gauntlet.

https://snapshot.org/#/aave.eth/proposal/0x5f232a89e10d67df3aad2907e8dce3bec9708596929b3254055cf37499969b89

Thank you to everyone for contributing to the discussion, especially Chaos and Gauntlet for supporting on the risk parameters.