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 |