[ARFC] Add UNI to Ethereum v3

[Llamaxyz]

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Title: [ARFC] Add UNI 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 UNI to the Ethereum v3 Liquidity Pool.

Abstract

The UNI token is the governance token of the Uniswap ecosystem and is a DeFi bluechip. UNI was one of the first governance tokens to be integrated into the Aave ecosystem when it was listed on v1 and was included on Aave v2 when it was launched in December 2020.

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

Uniswap is a DEX with $4.18B in TVL, second only to Curve Finance with $5.06B, according to Defi Llama’s data. Uniswap is deployed on five networks. UNI provides Aave v2 with $15.86m of TVL. Something to note, it is possible with Aave v3 to delegate Aave’s UNI reserve holding governance influence to an address which can be used for voting on Uniswap proposals.

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 to be incorporated, prior to progressing to Snapshot.

Specification

Ticker: UNI

Contract Address: 0x1f9840a85d5af5bf1d1762f925bdaddc4201f984

Risk Parameter	Value
Isolation Mode	YES
Enable Borrow	YES
Enable Collateral	YES
Loan To Value	65.00%
Liquidation Threshold	77.00%
Liquidation Bonus	10.00%
Reserve Factor	20.00%
Liquidation Protocol Fee	10.00%
Borrow Cap	500,000 units
Supply Cap	2,000,000 units
Debt Ceiling	$17,000,000
Variable Base	0.00%
Variable Slope1	7.00%
Variable Slope2	300.00%
Uoptimal	45.00%
Stable Borrowing	Disabled
Stable Slope1	13.00%
Stable Slope2	300.00%
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 CC0.

[MarcZeller]

Hello, and thank you, @Llamaxyz, for submitting these proposals in 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 current caps are set in a conservative way.

the ACI is supportive of the current proposal.

[ChaosLabs]

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

[ChaosLabs]

UNI Parameter Recommendations:

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

The main differences between the analyses were the borrow cap, debt ceiling and LB recommendations. Gauntlet recommended a slightly more conservative approach for the launch, which was adopted as these can be increased (caps) and updated (LB) at a later stage.

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

Risk Parameter	Value
Isolation Mode	YES
Enable Borrow	YES
Enable Collateral	YES
Loan To Value	65.00%
Liquidation Threshold	77.00%
Liquidation Bonus	10%
Reserve Factor	20.00%
Liquidation Protocol Fee	10.00%
Borrow Cap	500,000
Supply Cap	2,000,000
Debt Ceiling	$17,000,000
Variable Base	0.00%
Variable Slope1	7.00%
Variable Slope2	300.00%
Uoptimal	45.00%
Stable Borrowing	Disabled
Stable Slope1	13.00%
Stable Slope2	300.00%
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 UNI:

Syntax	Description
Liquidation Bonus	10.0%
Supply Cap	2,000k
Stable Slope1	13.00%

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. The supply cap decrease from the original recs helps ensure that the new Aave V3 market can support all of the previous V2 market. There may not be any significant benefit to immediately setting the supply cap as high as 6,000k.

The stable slope1 increase keeps the stable and variable interest rate models proportional to the ones suggested here.

Chaos Labs Analysis

Overview

Chaos Labs supports listing UNI 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, UNI 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 UNI over the past 180 days was $4.6B, and the average daily trading volume was $121M (CeFi & DeFi). We find the market cap adequate and reasonable trading volumes as long as they are considered when setting appropriate supply caps, a debt ceiling, and borrow caps.

Liquidation Threshold

Analyzing MKR price volatility over the past, we observed daily annualized volatility of 85% and 30-day annualized volatility of 62%. Considering this volatility we support the suggested LT of 77%.

We support listing UNI as borrowable under reasonable limits of supply cap, as we do not observe a significant risk to the protocol by allowing to borrow UNI, 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 $20M. 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 UNI 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.

Given the concentrated liquidity of UNI we recommend a 9% Liquidation Bonus and a derived supply cap of 2.2M UNI, and a borrow cap of 1.2M UNI.

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 UNI 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	65%	77%	9%	20%	0.1	2.2M	1.2M	$20M

[Llamaxyz]

Hi Everyone,

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

https://snapshot.org/#/aave.eth/proposal/0x51d67ef69e901b34f1d111f2cd5d582c59cffa8d70b7939023febd20f7613b88

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