[ARFC] Create eMode Categories for Aave v3 on Ethereum

Title: [ARFC] Aave v3 on Ethereum - Create eMode Categories
Author: @llamaxyz - @MatthewGraham & @Dydymoon
Short Description: Deploy Aave v3 with a Stablecoin Correlated and Ethereum Correlated eMode Category.
Dated: 2022-12-11

Simple Summary

This publication proposes the community to deploys Aave v3 on Ethereum with two initial eMode Categories.


Aave v3 is currently deployed on Polygon, Avalanche, Arbitrum and Optimism networks all with eModes. In this proposal, @llamaxyz proposes, the Ethereum v3 deployment should include the following eModes Categories:

  • Stablecoin Correlated (DAI, USDC, USDT, FRAX, LUSD, BUSD, sUSD, TUSD )
  • Ethereum Correlated (wstETH & ETH)

Similar to all existing the deployments, the Stablecoin eMode will have LTV 97%, LT 97.5% and LP 1%. The Ethereum eMode will have LTV 92.5% LT 95% and LP 1% which is the same as the Polygon Matic Category and the Avalanche AVAX Correlated Category.


In the coming weeks Aave v3 will be ready for deployment Ethereum. Unlike other deployments, there is more in depth discussion relating to the initial parameters. Which assets to be listed on Aave v3 has been somewhat discussed and voted on. This proposal is a continuation of the initial parameter discussion with a focus on the creation of eMode Categories.

When Aave v3 was deployed on Polygon, Avalanche, Optimism and Arbitrum, each Liquidity Pool contained at least a Stablecoin eMode Category. Since the original deployment, a MATIC category was create on Polygon and an AVAX category was created on Avalanche. The trigger for creating such categories was the ability to recursive leverage yield derived from staking the native token. With many communities building yield generating products reliant on the recursive loop for yield, the introduction of the Ethereum Correlate eMode provides an incentive for communities to migrate products across to v3. Aave v3 eModes enable a lot more leverage due to the higher LTV and LT thresholds. With favourable liquidity conditions, these strategies can offer significantly higher yield than Aave v2.

Creating eModes on Aave v3 helps encourage products built on Aave v2 to migrate to v3. The eModes also encourage borrowing demand which can lead to higher utilisation of Reserves, which in turn leads to higher Revenue to the DAO. The limiting factor is liquidity. The new Aave Linear Pools on Balancer v2 will funnel liquidity into Aave v3 Reserve. The yield on deposits will flow to Liquidity Providers, hopefully exceeding the yield offered by other Decentralised Exchanges and attracts more deposits. The eModes are expected to create the utility that helps attract liquidity.

In time the DAO can consider the creation of other eModes, such as a Defi <> ETH correlated category or even BTC <> ETH correlated eModes. There eModes would encourage other communities to build yield products on Aave v3. They can even be used to create automated buy-back strategies for governance tokens. As these eModes are include cross asset pairing and have not be deployed on any Aave v3 deployment to date, we suggest considering these eModes as an upgrade post launch.


Upon deployment of the Aave v3 Liquidity Pool on Ethereum, the following eMode Categories are to be created:

  1. Stablecoin Correlated
  2. Ethereum Correlated

This follows the naming convention of the Avalanche v3 deployment.

The characteristics of each eMode Category is shown below:

eMode: Stablecoin Category

Includes Assets: DAI, USDC, USDT, FRAX, LUSD, BUSD, sUSD and TUSD

Parameter Polygon (%) Avalanche (%) Optimism (%) Arbitrum (%) Ethereum (%)
Loan To Value Ratio 97.0 97.0 97.0 97.0 97.0
Liquidation Threshold 97.5 97.5 97.5 97.5 97.5
Liquidation Penalty 1.0 1.0 1.0 1.0 1.0

eMode: Ethereum Correlated

Includes Assets: wstETH & ETH

Parameter Polygon MATIC (%) Avalanche AVAX (%) Ethereum ETH (%)
Loan To Value Ratio 92.5 92.5 92.5
Liquidation Threshold 95.0 95.0 95.0
Liquidation Penalty 1.0 1.0 1.0

Next Steps

We welcome community feedback on the proposed specification above in the comment section below. The Liquidation Penalty set at 1% on Ethereum could be adjusted higher to reflect the relative gas cost of the network. If the community has thoughts around this particular aspect, that would be greatly appreciated.

After some discussion, Llama will then follow up with a Snapshot. If the Snapshot meets the short execution requirements, the eMode Categories as detailed above are to be implemented upon deployment of Aave v3 on Ethereum.


Copyright and related rights waived via CC0.


This proposal seems non-sense to me:

  1. eModes categories and parameters are more on Risk contributors side.
  2. I believe the general appetite of the community is being conservative at the beginning (params and assets are misaligned then).
  3. It is important to take oracles (e.g. heartbeat) into account for eMode parameters.

No mention of any of the 3 points above.

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The two proposed categories make a lot of sense. Here are some quick thoughts:

Stablecoin Correlated
As USDC is the most widely used asset here, we’ll focus on looking at market statistics w.r.t. USDC. Here is the data for each other stablecoin in terms of correlation to USDC and volatility.

Asset Correlation Annualized Volatility
DAI 0.6360134363523353 0.07520787797204237
USDT -0.9387355919442245 0.083167357372289349
LUSD 0.023164599938603453 0.38219685984517476
SUSD -0.10644733595207438 0.37559131823481279
BUSD 0.14708433181779257 0.20832720041021555
TUSD -0.03723445277966629 0.3592963910047251
FRAX -0.02534000257895037 0.25140117969517578

One thing to note when interpreting these volatility numbers: They are going to seem a bit high has they are annualized (from 12/22), but this is still an apples to apples comparison between stablecoins. We’ll update our analysis if these trends change over time

  • DAI is an obvious one to include as its high usage and low risk
  • It might make sense to not add USDT given the fact that it is highly uncorrelated with USDC (albeit it has small volatility)
  • sUSD, LUSD, and TUSD do not seem to hold their peg as well as BUSD and DAI. They also have lower usage, so their are higher risk and lower value. That being said, the Aave community could bet on their growth and choose to include them here.

ETH Correlated

Right now, it seems like the community is pretty focused on keeping risk low. Given that, it is very unlikely that the wstETH and ETH pool should have this high of a LTV and Liquidation Threshold. Given the past price movements, potential price deviations, and recursive nature of potential positions in this assets, it would be more prudent to start the pool with a LTV of 85% and 90%, with a Liquidation Penalty of 3%. We’d be happy to push to increase these parameters later if the risks are appropriate.

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