[ARFC] Extend Safety Module Coverage to Polygon v3

Governance
1

title: [ARFC] Extend Safety Module Coverage to Polygon v3
Author: @Llamaxyz and 3SE
Dated: 2023-02-14

Summary

The proposal presents Aave the opportunity to extend the Safety Module coverage to include Polygon v3.

Abstract

The Safety Module is a set of smart contracts allowing AAVE & aBPT (representing Balancer V1 ETH/AAVE LP) token holders to stake their tokens in exchange for a share of the distribution of Safety Incentives sourced from the Aave Ecosystem Reserve.

Stakers in the safety module, lock their liquidity for a minimum of 10 days, and in the case of a shortfall event affecting the covered Aave markets, expose their stake assets to be mobilised to cover excess protocol debt up to 30% of their staked funds.

A Snapshot vote will determine if Aave extends the coverage of the Safety module to Aave Polygon v3. There is currently $154.80m of TVL deployed on Polygon v3.

Motivation

Aave v3 is the most recent implementation of the Aave protocol, allowing new features, optimizations, and mitigation of risks.

Aave v3 has been battle tested for ~11 months in several networks, and its code was deemed safe enough to be allowed deployment on the Ethereum mainnet by the Aave governance.

The authors are supportive of extending coverage of Aave v3 by the safety module in order to offer the Polygon v3 users the same level of coverage as v2 users.

Soon, rewards are to be distributed across the v3 deployment encouraging v2 users to migrate. Extend the Safety Module to the v3 deployment further supports the migration of user’s capital to the v3 deployment. To help facilitate this, BGD has released a migration tool which can be accessed Aave the Aave front end.

Specification

If a Short Fall event was to occur, similar to the CRV excess debt event during 2022, an ARC is required to determine how Aave is to respond. If Aave elects to proceed with auctioning funds held in the Safety Module, this will be implemented via an AIP.

This proposal is for Aave to agree in principle, via Snapshot, to set a precedent that the Polygon v3 deployment will be supported by the Safety Module if a short fall event were to occur.

A successful Snapshot vote which follows the AIP voting criteria will determine if the Safety Module is extended to cover the Polygon v3 market.

Copyright

Copyright and related rights waived via CC0.

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In support of this proposal, thanks for putting this together @Llamaxyz and 3SE.

As mentioned here: [ARC] Add Safety module support for Aave V3 Ethereum market - #3 by G-Blockchain

Why are other active V3 markets not considered?

For example, Avalance V3 has a higher TVL than Polygon V3.

Currently, does the Safety Module cover Polygon V2? I could not find anything in that regard.

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Hi @G-Blockchain,

We are currently in the process of creating proposals for the remaining v3 markets. These proposals will be on the forum shortly. By posting each individually, it enables Aave to focus the conversation on a specific deployment.

Polygon v2 is covered by the safety module.

https://snapshot.org/#/aave.eth/proposal/0x7da4985b2d5b1cbe6bbc0992d5c86030cedef2013487e4b53b4244c315c90155

1 Like
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Hey guys, before extending the Safety Module in its current form, can we introduce a discussion around the underlying risks in the current safety module design and some potential solutions?

During our coverage of dYdX, dYdX Grants commissioned some research by Xenophon Labs around their safety module, which was a fork of Aave’s. We find sincere congruities between the two, and think there is a more efficient way to protect borrowers.

We believe the primary issues with the current design are:

  1. Alignment of assets vs safety valve (AAVE).
  2. Efficacy of BPT approach in times of crisis.
  3. Incomplete implementation around the backstop module and, if completed, inefficient.

More detail on those and potential solutions:

  1. There is no risk of AAVE being the asset that makes up the bad debt (since there is no borrowing it!), so using that as the reserve asset seems like a sub-optimal and misaligned choice. The reserve factors better address this, but will take time to build up to be sufficient in size (thus the need for a safety module). The best reserve asset should likely target the most liquid asset, at bare minimum, which would be ETH or stables.

a. Are there other considerations on why the safety module should be made up of AAVE tokens? Or issues with using ETH or an LSD?

  1. BPTs are a great idea for liquidity but using the 80/20 weight can have the opposite effects on deep selloffs. In the research mentioned above, the impact on TVL in weighted pools from harsh sell-offs at different token weights shows the risk of an 80/20 pool as a reserve asset or even liquidity tool for reserve assets. We think, given the likelihood that AAVE price falls in the event of a safety module auction, a more balanced or even underweight pool would better serve the desired purpose. Gauntlet has also shared some thoughts on LP tokens during liquidations, which makes us think these are suitable as liquidity drivers but not as a reserve asset, if that is their usage here.

  1. In the docs there is a contract called the “backstop module” where users could deposit USDC and ETH and be the first bid for the Auction Module when Aave needs to be sold. Depositors would be rewarded with a revenue share. Although we couldn’t find any docs on implementation or usage of the backstop module besides the design, it makes sense as a way to turn AAVE into more liquid assets quickly. The question becomes though, why pay two parties (AAVE stakers and backstop module depositors)? We propose a better design would be to just incentivize ETH and/or USDC depositors and skip the auction step.
2 Likes
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Hi @John_TV_Locke,

@Llamaxyz has kicked off a discussion relating to potential Safety Module upgrades. We encourage all conversation relating to potential changes to the Safety Module be moved to the thread linked below.

This ARFC focuses on if we should extend the Safety Module coverage to include the Polygon v3 deployment, or not, with a Snapshot to be published in the coming days.

1 Like