ARFC: Add support for LDO on Ethereum v3

Thanks @Pauljlei for sharing Gauntlet’s analysis.

Gauntlet’s and Chaos’ recommendations differ in a few areas:

  1. Chaos’ recommendations for LT, LTV and Borrow Caps are more conservative.
  2. Gauntlet’s recommendations for LB and and Debt Ceiling are more conservative.

Following our previous joint proposals for parameter configurations of new assets alongside the profile of LDO as also explained below, if the community wishes to list the asset at this time, we recommend adopting the more conservative parameters at launch as they can be optimized and updated later, utilizing our simulation platforms.

Recommended Parameters:

Risk Parameter Value
Isolation Mode YES
Enable Borrow YES
Enable Collateral YES
Loan To Value 40.00%
Liquidation Threshold 50.00%
Liquidation Bonus 9%
Reserve Factor 20.00%
Liquidation Protocol Fee 10.00%
Borrow Cap 3,000,000
Supply Cap 6,000,000
Debt Ceiling $7,500,000
Variable Base 0.00%
Variable Slope1 7.00%
Variable Slope2 300.00%
Uoptimal 45.00%

Chaos Labs Analysis

Overview

Chaos Labs supports listing LDO 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, LDO 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 LDO over the past 180 days was $1.3B, and the average daily trading volume was $90M (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.

Screen Shot 2023-03-06 at 16.15.21

Liquidation Threshold

Analyzing LDO price volatility over the past year, we see that over the past year, we observed daily annualized volatility of 141% and 30-day annualized volatility of 121%. Considering the high volatility of LDO, we suggest an initial LT of 50%.

We support listing LDO as borrowable under reasonable limits of supply cap, as we do not observe a significant risk to the protocol by allowing to borrow LDO, 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 $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 LDO 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, a conservative cap for the initial launch of the asset.

The recommended 7.5% Liquidation Bonus yields a supply cap of 5.5M LDO and a borrow cap of 3M LDO.

LDO_liquidity_5_3_75p

Lido Exposure

Since AAVE is exposed significantly to Lido through stETH, LDO listing increases the 3rd party exposure to Lido. However, given that the suggested LDO debt ceiling is less than 2% of the stETH collateral already on AAVE, we do not view this as a risk.

Lido DAO Governance Considerations

Lido DAO has governance power that can significantly impact stETH. Given the considerable exposure of AAVE to stETH, it is important to ensure the usage of LDO on Aave will not negatively impact stETH. The recommended borrow cap of 3M is unlikely to affect the Lido governance process. Therefore, from this perspective, we do not see a risk in allowing this borrow cap.

Having said that, any amount of LDO can impact Lido DAO votes, so if the community wishes to take an extreme risk-off approach here, borrowing can be disabled altogether.

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 LDO 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 40% 50% 7.5% 20% 0.1 5.5M 3M $10M
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