[ARFC] Deploy a Gnosis DAO Credit Line Aave v3 Instance

[ACI]

Title: [ARFC] Deploy a Gnosis DAO Credit Line Aave v3 Instance

Author: @ACI and Karpatkey

Date: 2024-10-02

ARFC has been updated with latests Risk Parameters from Risk Service Providers. 2024-10-04

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Summary

This proposal is for the creation of a specific Aave v3 instance to extend a GHO credit line to Gnosis DAO using GNO and wstETH collateral.

Motivation

Gnosis DAO, a long term partner of Aave DAO, has expressed a need for flexible access to stablecoins. This proposal aims to address this need by leveraging Gnosis DAO’s treasury holdings as collateral for a GHO credit line funded by Aave DAO. By establishing this credit facility, we can enhance Gnosis DAO’s liquidity management capabilities while fostering closer collaboration between Gnosis DAO and Aave DAO.

The proposed credit line will provide Gnosis DAO with a reliable source of stablecoin liquidity, enabling them to manage their treasury more efficiently and respond quickly to market opportunities or operational needs. This arrangement also presents an opportunity for Aave to expand its services to other DAOs, potentially opening up a new market segment. The credit line will also serve as a proof-of-concept for further customized extension of credit to reputable DAOs and organizations in the industry.

The GnosisDAO GHO credit line is described by the following conditions:

1. Exclusive Borrower: Gnosis DAO will be the only borrower in this specialised GHO market.
2. Collateral Requirements: GNO and wstETH tokens will be the primary collateral. Other potential collaterals can be considered but must be approved at a later stage.
3. Risk Parameters:
   • Borrowing Rate (BR): DSR rate
   • Other risk parameters will be discussed and decided upon by relevant service providers in collaboration with GnosisDAO during the ARFC phase of this proposal.
4. Liquidation Process: Managed by a designated Aave entity to ensure controlled handling of collateral.
5. Progressive Cap Increase: An initial Cap of 5M GHO will be configured
   • Once the initial cap is utilized and the system operates smoothly for a predefined period (e.g., 1 month), the cap will increase progressively.
   • The increase will be contingent upon maintaining a healthy average Health Factor (e.g., above 1.5).
   • Further increases will be evaluated based on ongoing performance metrics and governance approvals.

Benefits for Aave

• A dedicated GHO borrowing market will increase the demand for GHO and its supply.
• Generates consistent income from the interest paid on GHO borrowing by Gnosis DAO.
• GNO is first-class crypto asset that is currently securing the Gnosis Chain ecosystem.
• Gnosis DAO will be able to further provide liquidity enhancing GHO’s value proposition as DeFi stablecoin in mainnet, and specially once GHO is deployed in GC.
• GnosisDAO is a reputable DAO with one of the largest treasuries and footprint in DeFi.

Benefits for Gnosis DAO

• Provides Gnosis DAO with a reliable and sustainable credit line to support its operations and growth.
• GNO as collateral will increase the treasury’s capital efficiency and help in yield generation by borrowing GHO and putting it to use.
• Tailored risk parameters offer better borrowing conditions compared to other lending markets.
• Permissioned liquidation within Aave representatives will ensure proper collateral management, minimizing the risk of market manipulation, price volatility and sudden large sell-offs, also protecting Aave from excessive losses.
• With the implementation of karpatkey’s infrastructure and risk management best practices, tooling and monitoring will be put in place to ensure the debt position is properly managed at all times.

Specification

The proposed Gnosis DAO credit line will implement the following:

• Credit Line Amount: 5 million GHO tokens to start, with the option to size up based on risk service provider feedback and DAO governance process.
• Collateral Assets: GNO and wstETH
• Authorized Users: Limited to Gnosis DAO and Aave DAO
• GHO Borrow Rate: Set to match the current sUSDS rate of 6%

This credit line will be implemented as a specialized Aave v3 instance with the following key features:

• Customized access controls to ensure only Gnosis DAO and Aave DAO can interact with the instance
• Tailored risk parameters for GNO and wstETH as collateral assets
• Regular reporting and monitoring mechanisms to track the usage and health of the credit line. ACI will propose further methods for safe management of this credit line pending further discussions with Gnosis DAO and risk service providers.

By implementing this credit line, we aim to provide Gnosis DAO with a flexible financial tool that leverages their existing treasury assets while maintaining the security and transparency inherent in Aave.

Risk Parameters have been updated 2024-10-04

5M credit line for GHO:

Parameter	wstETH	GNO
Chain-Instance	Ethereum-Gnosis DAO	Ethereum-Gnosis DAO
Isolation Mode	No	No
Borrowable	No	No
Collateral Enabled	Yes	Yes
Supply Cap	6,500	174,000
Borrow Cap	-	-
Debt Ceiling	-	-
LTV	78.5%	58%
LT	81%	63%
Liquidation Bonus	6%	10%
Liquidation Protocol Fee	10%	10%
Variable Base	-	-
Variable Slope1	-	-
Variable Slope2	-	-
Uoptimal	-	-
Reserve Factor	-	-
Stable Borrowing	Disabled	Disabled
Flashloanable	-	-
Siloed Borrowing	Disabled	Disabled
Borrowable in Isolation	No	No
E-Mode Category	-	-

Useful Links

Snapshot for Temp Check: Snapshot

Temp Check discussion: [TEMP CHECK] Deploy a Gnosis DAO Credit Line Aave v3 Instance

Disclaimer

The ACI did not receive compensation for creating this proposal. ACI and employees are holders and stakers of GNO as well as delegates within the Gnosis ecosystem. Gnosis DAO and Aave also share some service providers including finance service provider Karpatkey.

Next Steps

1. Publication of a standard ARFC, collect community & service providers feedback before escalating the proposal to the ARFC snapshot stage.
2. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal.

Copyright:

Copyright and related rights waived under CC0

[ChaosLabs]

Overview

Chaos Labs supports the creation of a Gnosis DAO credit line instance.

LTV, Liquidation Threshold, and Liquidation Bonus

We recommend aligning wstETH’s LTV and LT with the parameters on Ethereum-Main: 78.5% and 81%, respectively. Regarding GNO, we note that this will be a permissioned instance in which the Gnosis DAO is incentivized to maintain a healthy average Health Factor through the progressive cap increases described in Motivation section 5. Because of this, as well as observations of GNO’s volatility, we recommend setting the LTV and LT slightly higher than on the Gnosis-Main instance. Our simulations indicate that the LTV and LT can be safely set to 58% and 63%, respectively. Following the deployment of this instance and observation of position management, it may be appropriate to adjust these parameters.

Supply and Borrow Caps

Given this instance’s unique use case, we will not employ our usual methodology. Instead, it is anticipated that Gnosis DAO will use this instance primarily to borrow GHO against GNO, with wstETH serving as an asset that can improve the position’s health in times of stress.

Excluding the vesting and bridge addresses that are the top two GNO holders on Ethereum, we find a “real” on-chain supply of 1.8M GNO, or roughly $280M at the time of writing.

Etherscan

DEX liquidity is concentrated in a Balancer pool that currently holds $1.5M WETH paired with $5.95M GNO.

Liquidity is thus quite limited to support a large GNO collateral position. However, we note that this is a permissioned instance, meaning that the Gnosis DAO will closely manage the health of its position, while potential liquidations will be managed by a “designated Aave entity”, which will be incentivized to avoid bad debt, rather than to generate profit on liquidations. These factors, coupled with an LTV and LT that provide a strong buffer in the event of liquidations, allow us to recommend an initial supply higher than would otherwise be justified.

We recommend Gnosis DAO deposit an initial minimum of 87K GNO (with the supply cap set to double this value) to maintain a health score of 1.65 (at current prices), enough to ensure the position would not be liquidated following a 39% price drop (this was the observed difference between high and low prices on August 4 and 5) assuming no maintenance. wstETH is provided a large cap for which DEX liquidity is not a limiting factor; the asset will serve to improve health in instances where GNO’s price declines rapidly. Gnosis DAO should maintain a health score of 1.65 and must refill it back to that level with wstETH whenever the score falls to 1.4.

Regarding wstETH, we recommend setting a supply cap of 6,500 wstETH, which would be sufficient to provide cover for the entirety of the credit line after a 39% price drop.

Interest Rate Curve

We agree with the recommendation to set the GHO borrow rate equivalent to the sUSDS rate at 6% and recommend continuing to adjust it as the sUSDS rate changes.

Recommendations

Following the above analysis, we recommend the following parameters, along with a 5M credit line for GHO:

Parameter	wstETH	GNO
Chain-Instance	Ethereum-Gnosis DAO	Ethereum-Gnosis DAO
Isolation Mode	No	No
Borrowable	No	No
Collateral Enabled	Yes	Yes
Supply Cap	6,500	174,000
Borrow Cap	-	-
Debt Ceiling	-	-
LTV	78.5%	58%
LT	81%	63%
Liquidation Bonus	6%	10%
Liquidation Protocol Fee	10%	10%
Variable Base	-	-
Variable Slope1	-	-
Variable Slope2	-	-
Uoptimal	-	-
Reserve Factor	-	-
Stable Borrowing	Disabled	Disabled
Flashloanable	-	-
Siloed Borrowing	Disabled	Disabled
Borrowable in Isolation	No	No
E-Mode Category	-	-

[LlamaRisk]

Summary

Aave will produce a gated credit line with GNO and wstETH as collateral that can initially be used to mint up to 5M GHO. Only Aave DAO and Gnosis DAO will be able to access this facility. The borrow rate will be set at the sUSDS savings rate (currently 6%). Caps will be raised as needed by risk providers, and an Aave entity will manage liquidations.

LlamaRisk endorses both this proposal and the parameters @ChaosLabs has put forward. We also commend the @ACI, @Karpatkey and GnosisDAO for pioneering the first large-scale DAO-to-DAO credit line. Some risks remain (such as borrow rate fluctuation and usage), but these can be mitigated.

Potential risks

Counterparty risk

GnosisDAO is a reputable counterparty with a long history of high quality contributions to DeFi and Crypto. Aave has a long history of collaboration with the DAO, and generally speaking, there are few DAOs that are less suitable for such a credit line. This makes counterparty risk low in this instance. This is an excellent first partner with whom to launch this initiative. Counterparty risk is, therefore, low.

Borrow rate fluctuation risk

Source: Stability Scope Parameter Changes, Sky Forum, October 2nd, 2024

As Sky continues to establish further and incentivize users to migrate away from DAI, the sUSDS supply rate may continue to fluctuate - see above. As this credit line plans to match that, this interest rate will likely deviate further. Parameter changes must be regularly updated to ensure interest rate parity, introducing a small amount of risk.

Incremental Credit Limit Liquidity Risk

Should this credit line see significant usage, the credit line will be increased incrementally. While this is evidence of a successful market, careful attention should be paid to the collateral used. GNO is an asset with limited liquidity, so if 10M GHO is being borrowed against primarily GNO, Aave’s liquidation agent may find itself holding an asset it will find difficulty in exchanging. This risk should be of limited concern on the condition that a significant amount of collateral is wstETH borrowed against at the same time as GNO. Chaos Labs’ parameter recommendation - with which we are aligned - will enforce this. A 1.65 health score mitigates this particular risk.

GHO peg stability risk

GHO is still a growing asset. Despite reaching $150M recently with no signs of slowing down, if GnosisDAO plans on swapping every GHO minted, then there will be significant sell pressure on GHO, which may induce consequences. This will become increasingly important if the credit line increases and GHO continues to be sold. GHO liquidity remains robust thanks to the considerable efforts of TokenLogic and Karpatkey, and it would be preferable that this remains the case. This risk could be mitigated by outlining how GnosisDAO plans to use the GHO.

Conclusion

While the above risks are identified, mitigations are possible. The significant revenue and additional GHO this proposal will produce present an opportunity that outweighs the risks.

[ACI]

Thank you @ChaosLabs and @LlamaRisk.

Latest Risk Parameters have been added to ARFC as of today.

[sid_areta]

Hi all, we’re excited about the direction this is taking and the creation of a potential new business line for the Aave DAO in enabling DAO-to-DAO credit lines.

We just had a few questions around the proposed structure:

• Could you provide more detail around the liquidation process? Who exactly are these specialised liquidators? We need to make sure that the Aave DAO does not swallow any bad debt in this situation.
• Who exactly is the counterparty, is it the Gnosis DAO treasury itself or a SubDAO wallet?
• Given that GHO is still a growing asset, if Gnosis DAO plans on selling every unit of GHO obtained, it will place a lot of sell pressure on GHO. In agreement with @LlamaRisk, we’d like to get further detail on Gnosis DAO’s plans with the GHO and model out the level of sell pressure it would bring on GHO to understand whether the available liquidity is enough to absorb the pressure. We think this is critical before the ARFC vote concludes.

Overall, we’re very bullish on this use case / business line for the Aave DAO and would like to ensure that any further credit lines that are proposed are conducted through a pre-defined methodology.

[Karpatkey]

Thanks, @LlamaRisk, for your assessment and @sid_areta Areta, for your questions!

This credit line is meant to bolster the synergies between both DAOs and help to better position GnosisDAO* to:

• Increase GnosisDAO liquidity position in stkGHO-GHO;
• Consolidate current borrow positions;
• Bootstrap GHO liquidity on Gnosis Chain if/when applicable.

GnosisDAO is a strong supporter of GHO and will remain committed to use the asset mindfully, contributing to its growth.

The liquidation process will be managed by ACI, to ensure controlled handling of collateral.

*karpatkey acts as GnosisDAO Treasury Manager and will perform these actions.

[Kene_StableLab]

We are glad to support this initiative, Aave can potentially extend credit lines to numerous reputable on-chain organisations to create more value for the protocol.

The learnings from this will inform how the DAO should approach similar arrangements.