[ARFC] Emode Risk Parameters Aave ETH V3 Pool Update

[MarcZeller]

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title: [ARFC] Emode Risk Parameters Aave ETH V3 Pool Update
author: Marc Zeller, Aave-Chan Initiative (ACI)
date: 2023-06-06

Abstract

This ARFC proposes an update to the risk parameters for ETH-correlated assets (Category 1) in the Aave ETH V3 pool.

Motivation

The motivation behind this ARFC is to adjust the risk parameters for ETH-correlated assets (Category 1) in the Aave ETH V3 pool, specifically wETH, stETH, rETH, and cbETH. The proposed changes aim to enhance the efficiency and flexibility of these assets within the pool.

By adjusting the Loan to Value (LTV) and Liquidation Threshold (LT), we aim to provide more borrowing power to the users, thereby enabling more leverage on wETH/Liquid Staking Tokens (LST) such as stETH, cbETH, or rETH leverage loops. This increased leverage power will allow these strategies to be more profitable, thereby increasing borrowing volume on Aave and consequently, the protocol revenue.

These changes are proposed with the intention of fostering a more robust, dynamic, and profitable liquidity environment in the Aave ETH V3 pool.

As the Aave ETH V3 is the most liquid both on the Aave side & on LST primary & secondary markets side, it seems the fittest pool to experiment with less conservative emode parameters, providing valuable data for potential expansion on other Aave V3 pools.

Specification

The following table outlines the proposed changes to the risk parameters for ETH-correlated assets (Category 1) in the Aave ETH V3 pool:

Parameter	Current Value	Proposed Value
LTV	90%	93%
LT	93%	95%
LB	1%	1%

Next Steps

1. gather feedback from the community and risk service providers.
2. If consensus is reached on this ARFC, the proposal will be escalated to the Aave Improvement Proposal (AIP) stage for final approval.

Disclaimer

The Aave Chan Initiative has not been compensated by any third party for publishing this ARFC.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Thanks for putting this forward @MarcZeller .

In the Chaos Labs LSD Methodology Update, we discussed updating the pricing of LSDs to utilize the primary exchange rate. Coupled with the implementation of the price sync adapter, this will decrease the likelihood of liquidations, thereby allowing for the adoption of more aggressive risk parameters and caps.

Currently, the only asset in the Ethereum-correlated E-Mode on V3 Ethereum, where the oracle isn’t pricing according to the primary market exchange rate, is cbETH (see BGD. Operational oracles update).

@bgdlabs

As an update for the community, after checking deeper into the usage of the on-chain exchange rate of cbETH, we think more time needs to be allocated to study its pricing dynamics. So the swap of the cbETH feed will not be included in this proposal.

We recommend considering an increase in the LT of the E-Mode category only after ensuring all assets employ the primary exchange rate and the price sync adapter.

In addition, as we commented in the “killswitch” discussion, we recommend implementing a proof of reserve oracle or an alternative trigger mechanism as a backstop for a black swan event, limiting potential risk to the protocol. We advise against increasing the risk parameters in this post at this time until the discussion around emergency triggers and mechanisms is complete and the community has aligned on the desired solutions.

[GarrettPetersen]

Gauntlet is digesting community feedback and preparing next steps for the LST e-mode killswitch. We recommend potential LT increases occur after the community has aligned on next steps for the killswitch.

[MarcZeller]

@GarrettPetersen

We recommend potential LT increases occur after the community has aligned on next steps for the killswitch.

We agree, this proposal will move forward when other discussions have been resolved.