Thanks, @Llamaxyz - Gauntlet is conducting analysis on the market risk side for this proposal. There may be nuances with the risks here associated with CRV, and we target providing analysis in ~2-3 weeks.
@ChaosLabs has already provided the revised SupplyCap
We plan on posting a Snapshot later this week.
We defer to the community preferences on the expediency required here. Gauntlet will continue our modeling and publish it as soon as possible regardless.
We have created a Snapshot starting tomorrow and extending to Sunday.
Thank you in advance to everyone who participates in the vote.
While we would have preferred waiting for @inkyamze Gauntlet recommended parameters for this proposal
The current ACI position on this proposal is YAE. we will wait until the last day of the snapshot vote or the publication of the recommendation from gauntlet to post our vote or change our position.
We understand that risk teams have backlog and not infinite resources, and we have to balance this with the strategic aspect of making the protocol evolve and stay competitive will sometime lead to moving forward without both reports.
That being said, when it’s an option, having both Chaos & Gauntlet reports are true net positive for AIPs.
Thanks for identifying this opportunity to optimise CRV revenue. While it’s ingenious to make some changes, I’m surprised to see a single snapshot bundling so many changes for CRV, each with their own risk implications.
What are your considerations (besides revenue) in the interest rate model calibration?
- Doubling slope 1, means a volatile borrow rate at low levels of utilisation, increasing risks for users
- Increasing the Optimal Utilisation to 80% and the borrowing cap to 90%, would encourage high utilisation leaving little liquidity for liquidations and withdrawals
Today, users are paying 58% to borrow on Polygon V3, this would take us to 84% utilisation based on this Llama model, with only 16% of liquidity available, not enough to liquidate PolygonV3 top supplier of CRV who is actively borrowing against.
I’m in favour of optimising the interest rate model for revenue but not increasing risks so significantly. I believe its important to maintain low rate volatility at low utilisation for usability, while preserving available liquidity for solvency, for example:
- U 70% → Max borrow cap 80%
- Base 3%
- Slope 1 7%
- Slope 2 250%
→ Users could borrow up to 75.5% of the asset pool for cheaper than they are paying today
Still, I see no reason to skip the reasonable delay for Gauntlet to make their recommendation. They just expanded their mandate to cover interest rate model, with a robust qualitative model. Risk contributors represent a significant expense for the DAO, it doesn’t seem reasonable to make risk decisions without leveraging this ressource.
With a slope1 parameter of 7%, all communities with veTokenomics tend to have a Reserve utilization consistently around the Uoptimal value. The gradient of when the utilizations meets the following criteria, Uoptimal < Utilization < 100%, is fairly steep on the existing interest rate curves, 5.33 current versus 6.8 proposed.
Uoptimal < Utilization < 100%
Current gradient on Polygon v3, is 5.33 and proposed gradient is 6.8. Meaning, as utilization increases by 1%, the borrow rate increases at 6.8%. If the Slope2 parameter was changed to 120.5%, this would reduce the gradient equal to the existing interest rates when utilization exceeds the Uoptimal value. Having a greater rate of change (6.8 > 5.33) when utilization > Uoptimal is desirable for Aave. This encourages utilization to stay < Uoptimal value.
Why the Base and Slope1 parameter increase ?
0 < Utilization < Uoptimal
The current gradient is 0.1556, the proposed is 0.1375. In fact, the newly proposed interest rate curve have a lower gradient than the existing curves which means the “volatility” (more accurately defined as the rate of change) is lesser than the current proposal. The proposed curves actually lead to a better User experience as utilization can consistently fluctuate across a wider range of utilization with a lower rate of change.
The above statement is factually incorrect. The gradient of the proposed interest rate curve is lesser than the existing gradient. This reduced rate of change, gradient, reduces volatility when the following condition is met, 0 < Utilization < Uoptimal.
Lets touch on the Uoptimal value, current 45 and proposed 80, the intent here is to improve a very inefficient underperforming CRV Reserve. 80 is high that is true. With a Slope1 of 14%, the desired affect is for actual utilization to be < Uoptimal. However, we do not intend on jumping Slope1 aggressively to achieve this. In our opinion, doubling the Slope1 parameter is probably the maximum single increase we should perform. This approach is derived from more holistic thinking that takes into consideration the user experience and knowing that we can simply delivery another upgrade at a later date. Future proposals may increase the Base and Slope1 value to achieve this over time.
We expect utilization to increase and for the market to find equilibrium beneath Uoptimal utilization. Our view is firm on the 14% Slope1 value, however pivoting Uoptimal to 70 is something we can do and in time we can walk this Uoptimal value higher pending what the markets feedback is.
If Aave was to have a policy that assumes all liquidation liquidity is derived from Aave itself, then yes the point around BorrowCap being to high is true. However, this neglects all other available liquidity pools and Market Makers who hold the asset, it is a restrictive conceptual limitation. Given the linear relationship with liquidation fees, the fee offsets any price impact from purchasing CRV. We believe liquidation liquidity should be sourced more widely than just Aave and thus prefer a higher BorrowCap. However, similar to the Uoptimal value, we can start lower and walk this up over time.
Llama will likely be expanding its services to offer an alternative quantitative model to Chaos and Gauntlet. For this proposal the SupplyCap was provided by Chaos Labs and the CRV is at 100% capacity for some weeks before Llama put forward a plan.
After examining Llama’s IR curve recommendation, Gauntlet would recommend making the following changes to the proposal:
- Setting the Uoptimal to 70%
- Maintaining the Slope 2 at 300%.
CRV’s interest rate on Polygon v3 has averaged 32% (31% median) since Jan 1st. Llama’s proposed IR curve parameters would result in a utilization rate of ~83% in the Polygon v3 market if the borrow interest rate stays at 32%. As noted by Llama, borrowing demand has increased on Polygon v3 since the beginning of 2023. The demand for borrowing is expected to continue based on yields being offered to CRV holders and historical borrowing demand.
We recommend setting the Uoptimal at 70% and maintaining Slope2 at 300% for the following reasons:
- The market borrow rate on Polygon v3 is greater than the recommended Slope1 rate of 14%. Utilization above 80% would place the liquidity pool at high risk of preventing suppliers from withdrawing collateral and increase the risk of failed atomic liquidations. The proposed interest rate curve is not calibrated to manage liquidity risk and maintain utilization below the Uoptimal if market demand continues at 32% (or higher). Thus we recommend to calibrate the Uoptimal point lower and maintain Slope2 at 300% in order to increase the likelihood of ample liquidity within the pool.
- Whale user
0x7a16ff8270133f063aab6c9977183d9e72835428has a balance of 83M CRV, representing 75% of supplied assets in the v2 ETH pool. Even though borrowing is disabled, there are still risks associated with increasing the Uoptimal to 80% and decreasing the Slope2 rate. The CRV borrowing market on v2 ETH is still active with borrows at $41.8M (6th largest on ETH v2 market) and utilization rate at 41%. Changes to Uoptimal and Slope2 curves would minimize the IR risk levers by discouraging new supply to come into the pool if suppliers were to start withdrawing. Lower incentives for suppliers when the CRV ETH market reaches high utilization might create liquidity issues for this highly concentrated market. We recommend more conservative IR parameters in order to maintain ample liquidity within the pool. Similar to the ETH v2 market, Polygon v3’s market is compromised of large positions as well. The top 5 suppliers on Polygon v3 represent approximately 54% of supply in the liquidity pools.
CRV Account Supply Concentration per Market
We recommend recalibrating the Uoptimal point to 70% and maintaining the Slope2 rate at 300 and to monitor how the market performs after implementing the proposed IR parameters prior to increasing Uoptimal or adjusting the Slope2 lower.
|Polygon v3 Reserve Factor
The recent discussions indicate the need for consensus on this proposal.
The initial proposal was complex and considered 4 differents changes on an asset, we invite the community to reach consensus on this and re-run this proposal in the form of 4 different votes that will allow the governance to express their opinion with more granularity.
For now, the ACI cast a NAY vote for the snapshot proposal and would like to thank llama, Gauntlet & Alex from aaveCO for their work on this proposal.
We will monitor the evolution and are ready to support a re-run with more maturity & consensus reached.
To clarify, Gauntlet’s Interest Rate Curve recommendations here apply to all the CRV markets listed in Llama’s proposal. We generally recommend IR curves to be the same across markets in order to reduce the likelihood of dynamics that would incentivize outsized utilization on one market (although there are edge cases).
As such, we would not be opposed to having one Snapshot that bundles all these IR Curve changes, instead of having multiple Snapshots.
We have updated the proposal to reflect @Pauljlei (Gauntlet) feedback and unless additional feedback is shared, we will resubmit this proposal for Snapshot in the coming days. It will most likely be submitted Sunday, so that voting can start on Monday 6th February.
A Snapshot has been created.
Thank you in advance to everyone who participates in the vote.
Even if the proposed parameters are technically correct in this and other cases, we would like to insist and raise awareness in the community on how critical the increase of the Optimal utilization point of the rate strategy (Uoptimal) is.
Lack of liquidity for liquidation of volatile assets, especially those with no “special” dynamics (e.g. not wstETH) can lead to simply a scenario of apathy from liquidators and an increased probability of bad debt, as other community members and providers already commented. This should not be taken lightly for the sake of any revenue optimization, the security of the protocol is first.
In addition, we think at least 1 of the risk providers (Gauntlet, Chaos Labs) must always fully agree with any proposal from the community. If some analysis time is required (reasonable), assurance goes before speed.
Would it be possible to put the:
- IR/CAP update for polygon v3 in one proposal and
- the v2 upgrades into another
I think it’s reasonable to be in favor of the first, but against the second.
I think “flattening the curve on frozen v2s”, is a bit unreasonable for various reasons.
- these pools are frozen, so no further borrowing can happen. Essentially the IR update would be a gift to current CRV shorters, by heavily decreasing their rate.
- assuming the reserve might ever be unfrozen again, i think the high uOptimal can be dangerous as on v2 there are no caps
- with CRV on Ethereum v3 i think migration to v3 should be encouraged - while I noted in another post that i’m against randomly changing IR rates (as it goes against predictability for potential users) I think it would be perfectly reasonable to have a more attractive IR on v3 compared to v2.
Great feedback @sakulstra.
@Llamaxyz is happy to submit a proposal for just the Interest Rate, SupplyCap and BorrowCap changes for the Polygon v3 deployment.
If Gauntlet can bless this from a risk perspective, not having all markets with the same interest rate, then Llama will move forward to submit an AIP. Please do comment here and let us know. The AIP is currently ready for submission.
If we are comfortable with v2, frozen markets, with different interest rates. Perhaps we move the Uoptimal to be 2-3% above current Utilization and increase the Reserve Factor whilst leaving the Base and Slope1 parameters as proposed. The objective would be to increase borrow costs but keep deposit APR for users similar to what it is now.
Generally, Gauntlet prefers keeping rates across markets consistent. However, given that borrowing is frozen on v2, we are not strictly against having different IR parameters across markets.
However, Gauntlet would support maintaining Uopt = 45% and increasing Slope1 = 14 and Slope2 = 300 for ETH v2 and Polygon v2 markets. This would support migration and mitigate risk to the v2 markets. By maintaining the Uopt = 45% but increasing the Slope1 to 14% and Base to 3% to match, the proposal may incentivize larger borrowers to repay. If not, then the revenue to Aave from CRV borrowing increases 2.5x.
There is no proposal live for CRV on Ethereum v3 so that’s a very theoretical migration. CRV on polygon has now been hovering 100% supply cap for weeks. Would imo be great to go live with the polygon v3 part of the proposal asap and reconsider the other parts if/once CRV is listed on Ethereum v3.
That said I wouldn’t oppose the suggestion by @Pauljlei - I’m just not convinced it’s worth further delaying the proposed cap update.
Thank you for the feedback.
@Llamaxyz will promptly incorporate the feedback from @Pauljlei regarding the new parameters and noting the need to move quickly, whilst minimising governance overhead, we will amend our existing proposal and resubmit to @bgdlabs for peer review.
Ethereum and Polygon v2
Just a gentle reminder, the following SupplyCap and BorrowCap are being implemented on Polygon v3.
We are looking forward to implementing this proposal and are actively working with both risk service providers to streamline the process.
For community transparency - as we mention here, the community should consider raising the caps on CRV only if they have an Aggressive risk preference.
This proposal is currently undergoing internal review at Llama and we hope to progress to the peer review stage soon. We are targeting submitting this proposal for on-chain voting next week.