A proposal to reduce Liquidation Threshold (LT) and Loan-To-Value (LTV), for CRV on Aave V2 Ethereum.
Motivation
Following our recommendations to decrease Aave’s exposure to CRV on V2 Ethereum here, we propose a series of LT and LTV reductions.
As Liquidation Threshold reductions may lead to user accounts being eligible for liquidations upon their approval, we want to clarify the full implications to the community at each step. To best minimize this impact, we suggest reaching the desired settings by a series of incremental decreases, following the Risk-Off Framework previously approved by the community, with a reduction of up to 3% in any given AIP. In an attempt to avoid liquidations, Chaos Labs will publicly communicate the planned amendments and list of affected accounts leading to the on-chain execution.
In the graph below, we share data to quantify and visualize the effect of the recommended reductions on protocol users. For the proposed, 3% LT decrease, the impact on users at the time of this post is negligible (2 accounts liquidated, ~3$ liquidated).
Liquidation Treshold
Accounts Liquidated
Liquidation Value
55
2
~$3
Specification
Asset
Parameter
Current Value
Recommendation
Change
CRV
LT
58
55
-3%
CRV
LTV
52
49
-3%
Next Steps
Following community feedback, submit the ARFC for a snapshot vote for final approval.
If consensus is reached, submit an Aave Improvement Proposal (AIP) to implement the proposed updates.
This proposal has a small impact on risky positions and does not meaningfully reduce Aave’s exposure to CRV. Managing the excess risk to CRV requires addressing both the supply growth and restricting more borrows that increase risk. We continue to recommend freezing CRV and setting the CRV LTV to 0 to combat both of these aspects.
That being said, for this proposal, we recommend changing the LTV to 0 rather than only decreasing by 3%. Decreasing the LTV by only 3% does not restrict borrows that increase risk and therefore does not meaningfully reduce the excess exposure to CRV.
Despite setting the LTV → 0 being circumventible, it provides an extra layer of difficulty for excess borrow to be taken out. We look forward to improvements across Aave v2 to make that check more rigorous and non-circumventable.
This proposal is only the first in a series of LT reductions, which will gradually minimize the exposure to CRV, aiming to ultimately wind down the market.
The suggestion to reduce LTV to 0 does not provide a material difference to the overall risk exposure, as it can be easily circumvented. Therefore we did not include it in the above proposal. Our strategy to reduce exposure and accelerate migration to V2 is by reducing LTs incrementally while increasing RFs across all markets. The initial proposal has already advanced to the Snapshot phase and will not be updated (votes have been cast).
We don’t have a firm view of the LTV setting, as its impact is negligible. Having said that, we won’t oppose another proposal to reduce it to zero.
