[ARFC] Chaos Labs <> Aave Risk Management Service Renewal

Governance
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Summary

Chaos Labs proposes to renew our engagement with the Aave DAO. We will provide our full suite of risk management products and services, covering all of Aave, including V2, V3, and GHO, across all current and future deployments.

Our current annual engagement is set to end on November 13th, 2024.

Background

In November 2022, Chaos Labs formally joined the Aave DAO as a service provider specializing in risk management and parameter optimization.

During this time, we have consistently demonstrated our unwavering dedication to the DAO, covering all aspects of the protocol across all deployments and providing the community with proactive risk parameter recommendations alongside reactive analyses and risk-mitigating strategies in light of significant market events. Chaos Labs has initiated over 230 ARFCs and posts, and actively engaged with more than 770 posts, including parameter optimization, onboarding of new assets and new deployments, deprecation of V2 and migration to V3, GHO growth, and community support during major market events.

Throughout our engagement, the protocol incurred minimal bad debt, even during significant market events, including those on August 6, 2024, which resulted in zero bad debt.

:bulb: A comprehensive summary of Chaos Labs’ activities over the past contract year is available in our monthly community updates here. Chaos Labs - Monthly Community Update

Highlighted products and ongoing work

Products:

Analyses and Proposals:

Proposal

Chaos Labs offers a comprehensive risk management and optimization platform for Aave, covering the entire spectrum of Aave, including V2, V3, and GHO, across all current and future deployments.

Our strategies aim to secure protocol assets against market volatility, black swan events, liquidity attacks, and market manipulation. Our methodologies are rooted in an integrative approach, offering protocol robustness and protecting funds from market risks through dynamic risk parameter recommendations. We provide a holistic approach encompassing software and services to mitigate risks in volatile markets, countering economic attacks on the protocol and ensuring the secure preservation of user funds.

Scope

Risk Parameter Optimization

Using our state-of-the-art risk simulation platform, proprietary methodologies, and a highly skilled team of data scientists and researchers, we deliver in-depth analyses and strategic recommendations for optimizing risk parameters. Our cutting-edge simulations utilize real-time protocol dynamics and on-chain behaviors to rigorously stress-test the protocol, uncovering potential vulnerabilities and opportunities for enhancement. This advanced approach provides a detailed understanding of the factors influencing protocol health and stability, enabling us to offer data-driven recommendations that maximize protocol revenue while safeguarding user funds and mitigating risks.

Our coverage includes support for all Aave risk parameters, including Liquidation Thresholds, LTV, Liquidation Bonus, Supply and Borrow Caps, Debt Ceilings, and Interest Rate Curves.

Risk Oracles

Enhance the capabilities of Edge Risk Oracles, developed by Chaos Labs, to better meet Aave’s specific requirements, enabling more efficient and dynamic adjustments to risk parameters. This will streamline the risk management process, minimize the need for manual interventions, and significantly improve the protocol’s operational efficiency and security.

Currently, this initiative is under governance review for the Lido Instance, with plans to expand coverage to additional parameters and deployments in the future.

As part of this initiative, we will enhance our product by introducing a dashboard that monitors Risk Oracle updates, enabling the community to track historical changes and assess the impact of parameter optimizations over time.

Risk Monitoring and Alerting

We offer real-time monitoring and alerting services through the Chaos Labs Risk Monitoring Platform. These services allow users to assess ecosystem risk and protocol health at granular levels using dashboards and data visualizations. Users can drill into specific scenarios in which the protocol could be negatively impacted and receive alerts concerning significant changes to on-chain activities that could pose a risk or detriment to the protocol’s health.

As part of our commitment to delivering a world-class risk management solution for the DeFi ecosystem, we constantly iterate and improve the platform with additional features and enhancements. The Aave community will continue to gain access to the newest feature additions and enhancements continuously, allowing users to stay ahead of the curve and make informed decisions while optimizing their overall portfolio performance.

Screenshot 2024-09-27 at 15.50.34

Risk Stewards and Guardians

We act as Risk Stewards, carefully managing risk while adjusting supply and borrow caps according to predefined rules. This enables us to continually raise caps, fostering protocol growth without compromising safety. A current governance proposal aims to expand the Risk Stewards’ authority to encompass a broader range of risk parameters, allowing for more agile and timely adjustments based on market conditions. Additionally, we serve as signers on the Aave Protocol Guardians, ensuring protocol security in critical situations, and as GHO Stewards.

Deprecation of V2 and Migration to V3

Chaos Labs has spearheaded several community initiatives to deprecate the V2 markets and facilitate the transition to V3, as outlined in the ‘Background’ section.

As we progress with the deprecation plan and migration efforts, we are committed to continue allocating resources and offering the community recommendations for proactively adjusting V2 parameters. This includes updates to Liquidation Thresholds, Reserve Factors and enhancing the capital efficiency of V3 markets to ensure a seamless migration of positions from V2.

Given the extended nature of the transition to V3, it remains imperative to uphold proactive risk management for V2 during this transitional phase.

Protocol Growth

Chaos Labs will provide integral support to the protocol growth initiatives through detailed market risk assessments and parameter recommendations for new asset listings and deployments.

As we onboard new assets and deployments, the Chaos team will seamlessly integrate them into our systems to facilitate continuous monitoring and parameter optimization. We uphold the same high standard for all assets and deployments, ensuring consistency and excellence across the board. Our goal is to provide unwavering support for the protocol’s expansion and sustainability.

GHO

Chaos Labs is committed to the continued growth and safety of the stablecoin and will provide ongoing support, including:

  • Parameter Optimization - We will conduct data-driven research and simulations to recommend optimizations for GHO-specific parameters, including Borrow rate, stkAAVE discount rate, bucket capacities, GSM, and DEX liquidity goals.
  • Ongoing Risk Management, Monitoring, and Analytics - We will continue iterations on our unified risk monitoring and alerting platform for GHO across primary markets (Aave), including all facilitators and secondary markets (centralized and decentralized exchanges). Our risk management services include economic reviews of GHO and ecosystem adoption across primary and secondary markets, peg stability, GHO backing composition, and more.
  • Facilitator’s Risk Framework, Recommendations, and Monitoring - We will continue to enhance our risk framework to consider potential facilitators and their corresponding GHO credit lines and provide ongoing risk analysis for potential and existing facilitators based on this framework.

Chaos Team Support

As part of our services, we assign a dedicated protocol manager supported by our world-class team of researchers and data scientists to lead all risk-related communications and inquiries with the Aave community.

Our team support typically covers two main areas: ongoing management and incident response. In the event of any incidents or issues, our team will be on hand to provide timely and effective incident response, minimizing the potential impact on the protocol and its users.

Ongoing and Proactive Risk Management

This includes detailed analyses of new asset onboarding, assessing the potential risks and benefits of launching in new markets, and providing a thorough understanding of parameter recommendations, including qualitative data and position analysis.

Incident Response

This includes supporting various events, including liquidity changes, asset depegs, price volatilities, etc. Our team provides ongoing support in these events, including market monitoring and alerting, ad-hoc risk analysis, and recommendations on risk-mitigating actions.

Our team of experts brings a wealth of experience in risk management and data analysis, enabling us to provide the insights and recommendations necessary to navigate even the most challenging market conditions. By working closely with the community, we can provide the support and guidance necessary to promote Aave’s long-term success and sustainability.

Communications:

  • Our team will share our recommendations and analyses through dedicated governance forum discussions, maintaining transparency and facilitating effective communication with the community.
  • We commit to providing a monthly update post, highlighting completed work and outlining our future focus areas.
  • We are consistently available for community calls and regularly schedule check-up calls with Aave delegates. These calls primarily focus on addressing risk-related inquiries, offering insights into existing proposals, and gathering general feedback.

Terms

  • 12-month engagement, November 13th 2024-November 13th, 2025
  • $2M, streamed linearly throughout the engagement.
    • $1,000,000 in GHO
    • $1,000,000 in aUSDT

Specification:

If this proposal is approved, a stream of the allocated budget will be activated, with a Chaos Labs-controlled account (0xbC540e0729B732fb14afA240aA5A047aE9ba7dF0) as the recipient.

Regarding technical implementation, the AIP will call the createStream() method of the IAaveEcosystemReserveController interface to create a stream of 1,000,000 aUSDT and 1,000,000 GHO for a 12-month duration.

Disclaimer:

Chaos Labs provides ongoing risk management services to several other borrowing/lending protocols, such as Benqi, Venus, Gearbox, and more. These commitments do not interfere with our responsibilities concerning our association with Aave. We conscientiously provide explicit disclaimers and relevant context in any proposals that may influence clientele across the DeFi ecosystem.

This proposal was not commissioned or paid for by any third party.

Next steps

  1. Following community feedback, we are targeting a Snapshot vote.
  2. If consensus is reached, submit an Aave Improvement Proposal (AIP).

Copyright:

Copyright and related rights waived via CC0

5 Likes
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Some feedback and my opinion about the proposal:

  • First, congratulation to @ChaosLabs for the 2 years anniversary contributing to the Aave protocol. Similar as with Certora or other long time contributors, from an AAVE holder perspective is nice to see quite some stability of entities working with the DAO.
  • In terms of performance during the currently ending engagement, from my perspective the quality has been kept from before, while adapting to the ever-changing environment and requirements: the Aave protocol has changed importantly (e.g. new types of assets getting big important, new networks), GHO was released and even if still growing, having a important role; and growth has accelerated even more, which sometimes requires the risk side of the DAO to move at different speed.
  • In a field like risk, transparent communications on this forum is very important, and frameworks around them. Also, internal communications and synchronisation between the risk providers (LlamaRisk engaging early this year) looks from my external perspective good, without the friction we continuously saw previously with other providers.
  • Risk is a very “hot” contribution line, sometimes perceived externally as very conflictive with growth. It is fundamental for providers to keep a good balance between protecting the interests of Aave, while being communicative and reasonable with partners. From my perspective, Chaos has kept this balance correctly.

On the side of feedback for this renewal, I see the following areas as points of potential focus/improvement:

  • Risk frameworks should be less “monolitic”, and more evolving continuously as new assets get listed, new versions of the protocol are released or Aave expands to different networks. Yes, the Aave protocol design is elegant enough to allow very generic risk management, and still efficiently, but in my opinion we are going to see more and more custom use cases within Aave v3’s and within chains; and risk strategies should be aligned.
  • It is a continuous improvement process, but at the moment there are still too many governance proposals related with risk. The Aave DAO is in a very privileged position, as strong delegates assure always participation. But that should not be a reason for apathy, and the community needs service providers on both technical (where I participate via BGD) and risk areas to keep improving.
    The expansion on the Stewards side should improve this very significantly, but the target should be always moving up.
  • In my opinion, it is mandatory to maximise the collaboration between Chaos Labs and LlamaRisk, ideally getting more and more joint initiatives in the context of Aave, combining the strengths of both contributors. And of course, always keeping indepedence between both parties.
  • Chaos Labs has disclosed historically its non-exclusive service provider nature, and similar as with others like Certora, LlamaRisk or Karpatkey, personally I don’t see any problem with it.
    However, it is very important that on the side of establishing frameworks, or innovation, on one hand Aave is prioritised compared with any other lending protocol, given the historic relation; and on the other hand, any new collaboration of Chaos with potentially competing customers is transparently disclosed in the forum, for the community to evaluate.

In summary, I think Chaos Labs has delivered during the previous engagement\s and don’t have any reason to think this will not continue being the same. Support on this proposal.

2 Likes
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Thank you for your valuable feedback. We fully agree that risk frameworks must continuously evolve as Aave grows. Keeping our risk methodologies up to date with these developments is our top priority.

1 Like
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First of all im glad to see Chaoslabs is sticking with Aave and celebrating 2 years of engagement and great work.
They have been responsive, fast and always reliable and have been working good together with LlamaRisk from what I heard.

I think what @eboado said is crucial. The protocol reached a level where it’s important to stick with their partners and have a reliable team of SP that also accept and see the importance and also the privilege of working with the DAO.
Just like in the Certora proposal it is important that any future collaboration with other lending protocols will always be disclosed and crucial topics like problems in a deployment will only be made public after the DAO agrees to do so.

Additionally the protocol keeps evolving, with specialized markets, GHO and v4 upcoming. This means that risk has to evolve too and try to adapt but also make things easier to not have governance overload. I think this has improved overall by implementing different new tools and initiatives, but still this has to be pursuit.

Overall im supportive and happy to see engagement for another year.

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The current proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

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Having Chaos Labs as a cornerstone of Aave risk management over the last 2 years has been crucial to maintaining the safety of the protocol, which is one of Aave’s defining features. The depth and quality of Chaos’ analysis, combined with the positive relationship they have cultivated with LlamaRisk, the other risk provider, is significant for the DAO, and they have always been very open to work together and reach out for any feedback or opinions. As @eboado said, finding the appropriate balance between risk and growth for a protocol like Aave is a difficult task, and Chaos has managed to thread the needle well over their entire engagement.

We’re also encouraged by the leading work Chaos has done in developing Edge Risk Oracles, which will lead to a more automated and efficient Aave protocol over the near term. We’re looking forward to this being rolled out more widely in v4 and cementing Aave as the leading lending and borrowing protocol in crypto.

Lastly, collaborating closely with LlamaRisk is a huge plus for the protocol - they bring differentiated legal, regulatory, and ‘qualitative’ expertise combined with a focus on RWAs, and Aave should make use of this unique mix of service providers to grow quickly while keeping a close eye on risk at all times.

All in all, we are very much in favour of continuing Chaos Labs’ engagement with Aave for the next year.

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Disclosure:

Chaos Labs engages a customized version of the “Dolce Vita” service provided by ACI, for which ACI is compensated. In this arrangement, ACI delivers monitoring, implementation, and various quality-of-life services to Chaos Labs. Additionally, ACI is paid to support Chaos Labs with their own governance implementation journey.

While we do not view this as a conflict of interest, to address any potential concerns, ACI will abstain from voting on the ARFC and AIP related to Chaos Labs’ renewal.

1 Like
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After Snapshot monitoring, the current ARFC Snapshot ended recently, reaching both Quorum and YAE, with 415K votes.

Therefore the ARFC has PASSED.

Next step will be the publication of an AIP for final confirmation.

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