[ARFC] Flashloans Update

Governance
1

This Proposal is on hold until 2024 to collect feedback, Feel free to post constructive comments to help craft a better version of the proposal.

[ARFC] Flashloans Update

Title: [ARFC] Flashloans Update

Author: ACI (Aave Chan Initiative)

Date: 2023-12-08

Summary

This ARFC proposes to disable all flashloans on Aave V2 and reserve V3 flashloans exclusively for governance-enabled entities.

Motivation

In continuation of the plan for deprecating the Aave v2 protocol, and the fact that flashloans are not a significant part of Aave DAO’s revenue, this proposal aims to disable V2 Flashloans & restrict the use of V3 flashloans to only governance-enabled entities.

Flashloans, despite clear benefits, have further seen their attractiveness diminish as other actors in the ecosystem have replicated the Aave feature and decided not to charge any fee for it. This has made Aave Flashloans less appealing except in situations where the sizable liquidity in Aave makes it the only viable option. However, even when that’s the case, some actors have started circumventing the direct flashloan to avoid the fee by flashborrowing on other venues for free and using that on collateral on Aave, then borrowing and repaying in the same transaction, bypassing the flashloan fees.

Considering this, the ACI views flashloans as a potent tool, and the substantial liquidity of Aave makes it competitive. So instead of extracting minimal revenue from it, we advocate for a shift in strategy and propose reserving flashloans for governance-enabled actors. These actors will be selected through governance.

This will offer a competitive advantage to Aave DAO’s close partners and strengthen our relationship with protocols that prioritize Aave. It is a shift in strategy that aims to increase the utility and value of Aave’s sizable liquidity.

Changing the approach to flashLoans protocol-wise also allows significant gas-optimizations for this feature, making them more optimized and less costly for governance-enabled partners at the benefit of their end-users.

This change will enable Aave DAO’s close partners to gain a competitive edge and reinforce our relationships with protocols prioritizing Aave.

Specification

To implement these changes, the following initial actors are suggested for the flashBorrowers whitelist:

  • Avara-run Aave Frontend application: available at app.aave.com. This application is utilized for debt, collateral, withdraw switch features, and any other feature leveraging flashloans.
  • DefiSaver: DefiSaver is one of the earliest protocols to integrate Aave, having done so since 2020. It provides automated management of digital assets for its users, thus making it a suitable candidate for the whitelist.

These entities were selected based on their longstanding relationship with Aave and their responsible usage of flashloans in the past. The governance process will decide on additional entities to be added to the whitelist in the future.

The implementation of this AIP will be a joint effort from the ACI & Avara.

Useful Links:

Flash Loans FAQ

Developers Documentation

News on Flashloans

Next Steps

  1. Collect community feedback on this ARFC
  2. Escalate this proposal to Snapshot vote
  3. If Snapshot vote outcome is YAE, Escalate to AIP vote.

Disclaimer

This proposal is made independently by the ACI with inputs from Avara.

Copyright

Copyright and related rights waived via CC0.

3 Likes
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Supporting this ARFC. Flashloans since introduced have been a game changer and i think this tool can be useful again. Allowing entities to be whitelisted, same like with portals, will enable synergies between the DAO and the partners and hopefully also bring some good amount of fees into the DAO.

1 Like
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This is anti crypto and looking to allow the select few to benefit from flashloans. Which goes against an open market place.

It’s of more benefit to the Aave ecosystem to keep Flashloans open for all though V3.

3 Likes
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I completely agree. Keeping flashloans open to only those with ‘permission’ would ultimately be detrimental to Aave.

The proposed setup seems to disadvantage users, as these front ends could exploit the situation by charging additional fees, leading to higher costs for users due to a monopoly. This appears to benefit only a select few and not the majority of users. We should prioritize fairness and accessibility within the Aave ecosystem.

2 Likes
5

Some points from my side:

  • The community is taken steps for users to migrate from Aave v2 to Aave v3. Disabling certain features on v2 like flash loans can potentially help on this, but for extra context, different to v3, this is a binary decision: or they get disabled completely or not, there is no whitelisting possible on the existing implementation of v2.
    I would say I support disabling them on v2, but the community v2 current use cases should be heard first.

  • Flash loans on Aave v3 should not become an “elitist” model. There is countless of integrators out there with bigger or smaller use cases, and all of them should be whitelisted on request.
    I’m against of doing whitelisting only for the “native” tooling (it is not Avara frontend, it is smart contracts of the Aave DAO the ones that require whitelisting) and Defisaver, as it sounds arbitrary.
    There should be:

    1. An initial open list of entities to get whitelisted, to which anybody can apply.
    2. A well-defined procedure to apply in the future.

    Generally, I don’t particularly like any closed approach, or setting any kind of obstacle to legitimate users of Aave, in this case flash loan integrators. So the procedure to be whitelisted should be totally straightforward and managed somehow by the Aave DAO.

  • This will introduce important operational overhead, one way or another. Not so much on the initial stage, but on the whitelisting process.

  • A positive consequence of this proposal is that bad actors on the whole DeFi will have more obstacles to access what currently is almost unlimited liquidity. This is a hard conversation to have, but the Aave DAO as a leader in the space is a good actor to start said conversation.

  • Whitelisting at the moment on v3 (via FLASH_BORROWER role) is only a way of having 0 flash loan fee. The decision on who should have 0 flash loan fee versus who is whitelisted to use flash loans should still be a separate topic.
    If an use case of flash loans is organic and helps Aave somehow, in my opinion should be whitelisted AND flash loan fee 0. If the use case goes against Aave (as we see in multiple cases), or no whitelisting, or whitelisting with fee.

  • How is the strategy with the GHO flash minter facilitator? Seems it should be aligned somehow on the proposal.

A discussion with the broad community is really important on a proposal like this.

6 Likes
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Long time user, new to the forums. I am opposed to whitelisting access to a feature in v3.

It is protectionist and builds monopolies. At some point enough grubs will trickle in and Aave will end up controlled by those who benefit from the cheap liquidity. They will not want to whitelist new entrants and will limit innovation.

A process for whitelisting adds bureaucracy and cost to governance. If the goal is to create a decentralized autonomous organization we should look to remove layers of governance, not add more while building a moat.

Flashloans, despite clear benefits, have further seen their attractiveness diminish as other actors in the ecosystem have replicated the Aave feature and decided not to charge any fee for it

Does it cost Aave to offer flashloans as a feature? If the cost is negligible (it’s already implemented and doesn’t need to be governed) then why not continue to offer it to the community for the value it adds?

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In our opinion, we believe that this proposal could create value for the Aave Protocol if done correctly, considering Aave’s size and the enormous amount of liquidity accessible through FlashLoans, it makes sense to limit those who can access this functionality.

However if this proposal passes it must be followed up by a clear guide which will lay out the steps for getting whitelisted to use Aave’s FlashLoans, I agree with @eboado on the point that while creating these sorts of obstacles has its benefits, we need to make this process as transparent as possible.

1 Like
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Hello,

We are contango.xyz , we offer perps and other arb opportunities though leverage positions, i.e. the equivalent of automated looping through flash loans.

Since launch, 2 months ago, around $8M was traded on Aave (https://dune.com/contango/contango-v2):
1/ positions are entered using what we call “flash borrow”. This is an Aave flashloan where, instead of repaying the borrowed amount at the end, we just deposit collateral. To our understanding this proposal would also affect this type of flashloan
2/ to close positions we use Balancer, unless it doesn’t work in which case we try the next provider, which is normally Aave.

If this proposal go through, and we do not get whitelisted, then we would need to update our contracts to stop using those mechanisms.

Hence, we ask that the community takes into account existing integrators and how this proposal would impact their operations. We also ask to be included in the fashborrowers list.

Thanks!

2 Likes
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Considering, the governance Embargo, the approaching holiday season, and feedback.

The @ACI is putting this proposal on hold to improve it and propose a more suitable framework in the early days of 2024.

3 Likes
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Gauntlet Flashloan Analysis

Simple Summary

Gauntlet recommends keeping flashloans enabled across Aave v2. There is inherent tail-asset risk should flashloans be disabled on v2 caused by low flashloan liquidity sources outside of Aave, given the amount of current tail asset borrow.

  • In general for liquidations, users may bypass Aave’s fees by flashborrowing for free on other platforms and using that as collateral on Aave and then borrowing the debt to repay during liquidation.
  • However, with tail assets frozen on v2, this method may be less effective for liquidating tail asset debt. Flashloans on Aave v2 thus may be necessary for liquidating tail debt and ensuring arbitrage opportunities.

For v3, allow-listing flashloans could work since the liquidators are already concentrated and few. Should the liquidator behaviour remain the same, this likely does not add additional market risk. However, any migration to new addresses by flashloan liquidators or change in spec of flashloan contracts used by liquidators would introduce both opportunity costs to liquidators as well as inefficiencies in the market via the whitelisting process. We defer to the community on the choice to whitelist flashloan participants on v3 deployments.

Some key findings from the analysis[1]:

  • Flash loans on Aave v2 Ethereum account for about 7.8% of all liquidations and 2.9% of liquidation volume, these flashloans represent those that utilized the flashloan mechanism on Aave.

  • Top 10 flashloan liquidators on Ethereum Aave v2 liquidated 96% of all flashloan liquidations.

  • In 2023, there is an increase in flash loan liquidation volumes for some tail assets (BAL, REN, FEI) compared to previous years.

  • Flashloan liquidations on Aave v2 Polygon make up approximately 10.4% of liquidation frequency and 13.9% of liquidation volume. However, the top 10 flash loan liquidators represent over 93% of all flash loan liquidations volume, indicating higher concentration.

  • All v3 Aave protocols have a high density of flash loan liquidator profiles, with the top 10 liquidators contributing significantly to flash loan liquidations. All v3 protocols, show that the the top 10 flashloan liquidators contribute to >90% of all flashloan liquidation volume.

v2 Protocols

Ethereum Aave v2

As stated previously, disabling flashloans could impede liquidating tail asset borrow positions, which may add risk, given the amount of tail asset debt.

  • tail assets have been frozen on v2, preventing the flashloan fee get-around method described above during tail asset debt liquidations

An initial breakdown of flash loan liquidations with respect to all liquidations shows that flash loans that utilized the flashloan mechanism on Aave only make up about 7.8% of all liquidations and comprise of only 2.9% of all liquidation volume.

Liquidations Amount (USD) % Count % Volume
Flash loans 2228 36.8mm 7.8 2.9
All liquidations 28647 1.28bn 100 100

A further breakdown of liquidators by their liquidation frequency shows that the top 20 flash loan liquidators make up only 7% of all flash loan liquidators.

image

The number of flashloan liquidators per volume also show that just the top 10 liquidators contribute to 96% of all flash loan liquidation volume. This further corroborates the influence and concentration of flashloan liquidators.

image

A distribution of frequency of flash loan liquidations vs normal liquidations over the course of 4 year shows a down trend.

image

Gauging over the same time period for volume of flash loan liquidations vs normal liquidations, we see an a decrease in flash loan liquidation volumes post 2021.

image

However, analysis on a per asset basis reveals that some tail debt liquidations utilize flashloans more for 2023. FEI has an increase proportion of flashloan liquidations this year and, for assets such as BAL and REN, the only liquidations this year happen to be flashloans liquidations on Aave from Aave’s flashloan mechanism.

Asset Proportion of Flashloan Liquidation Volume in 2023 Proportion of Flashloan Liquidation Volume Historically Proportion Flashloan Liquidation Count in 2023 Proportion of Flashloan Liquidation Volume Historically
BAL 100.0 0.7 100.0 20.0
REN 100.0 0.0 100.0 4.2
FEI 9.8 0.2 41.7 11.5
BUSD 5.4 0.1 8.8 5.1
GUSD 4.7 6.4 16.7 12.5
ZRX 2.2 5.7 16.7 16.7
DPI 1.9 1.9 16.7 14.3
DAI 0.4 2.8 1.1 9.6
TUSD 0.2 1.6 5.6 13.5
USDC 0.1 2.6 0.4 6.1
WETH 0.0 16.0 1.6 10.4

Some users bypass Aave’s fees by flashborrowing for free on other platforms and using that as collateral on Aave. However, this method is no longer effective on Aave v2 due to the freezing of tail assets. Two recent transactions involved flashloans of ZRX and REN for liquidation purposes. Assets such as GUSD, REN, DAI, FEI, DPI, and BAL have all had flashloan liquidations this year as well. To add to this, some tail assets do not have substantial flashloan-able liquidity outside of Aave v2. As a result, disabling flashloans on v2 could impede otherwise healthy liquidations, which may add risk given the total amount of tail debt.

Last Liquidations by timestamp
last_liquidation debtName last_flashloan_liquidation
2023-11-15 04:30:11+00:00 ZRX 2023-11-15 04:30:11+00:00
2023-12-09 14:49:47+00:00 BUSD 2023-11-01 01:58:11+00:00
2023-12-11 02:08:23+00:00 TUSD 2023-10-12 22:48:35+00:00
2023-11-29 02:29:23+00:00 GUSD 2023-10-10 02:59:59+00:00
2023-10-07 20:10:35+00:00 REN 2023-10-07 20:10:35+00:00
2023-12-11 02:13:59+00:00 DAI 2023-09-11 20:02:11+00:00
2023-08-17 13:34:35+00:00 FEI 2023-08-04 01:18:59+00:00
2023-11-28 23:46:23+00:00 DPI 2023-07-26 12:36:11+00:00
2023-12-11 02:16:59+00:00 USDC 2023-03-22 12:00:59+00:00
2023-03-22 11:49:35+00:00 BAL 2023-03-22 11:49:35+00:00
2023-12-12 20:25:47+00:00 WETH 2023-03-20 02:11:11+00:00
2023-12-17 02:58:59+00:00 USDT 2022-12-06 13:26:23+00:00
2023-10-09 02:56:23+00:00 1INCH 2022-10-15 15:30:59+00:00
2023-12-14 00:47:47+00:00 WBTC 2022-08-28 01:04:38+00:00
2023-11-30 05:09:47+00:00 sUSD 2022-08-27 07:37:42+00:00
2023-12-09 13:17:47+00:00 LINK 2022-08-20 12:02:34+00:00
2023-09-11 08:44:47+00:00 FRAX 2022-08-20 07:02:03+00:00
2023-10-09 01:57:47+00:00 BAT 2022-08-07 05:42:48+00:00
2023-12-17 02:37:23+00:00 AMPL 2022-07-30 08:32:11+00:00
2023-09-27 00:18:11+00:00 MKR 2022-03-30 06:49:26+00:00
2023-11-14 16:18:11+00:00 SNX 2021-07-06 05:06:26+00:00
2023-11-02 08:34:47+00:00 xSUSHI 2021-06-22 20:48:24+00:00
2023-01-22 15:33:11+00:00 CRV 2021-06-19 10:08:47+00:00
2023-10-09 04:28:47+00:00 ENJ 2021-06-19 07:16:20+00:00
2023-03-03 04:19:11+00:00 YFI 2021-06-09 04:08:08+00:00
2023-02-19 15:14:35+00:00 UNI 2021-06-02 01:39:30+00:00
2023-04-23 15:52:11+00:00 MANA 2021-05-25 15:47:44+00:00
2023-02-03 06:51:35+00:00 UST Na
2023-02-13 22:41:11+00:00 renFIL Na
2022-08-21 00:57:16+00:00 KNC Na
2022-07-23 03:13:18+00:00 CVX Na
2023-01-27 12:06:23+00:00 ENS Na
2023-08-17 21:42:23+00:00 LUSD Na
2022-12-28 20:34:47+00:00 RAI Na
2023-12-07 03:09:47+00:00 USDP Na

Polygon Aave v2

A similar trend is observed across Polygon Aave v2, where flash loan liquidations (that utilized the flashloan mechanism on Aave) are not as significant with only 10% of liquidation frequency and ~14% of all liquidation volume being attributed to them.

index Liquidations Amount (USD) percentage count percentage volume
Flash loans 7183 71754525.7 10.4 13.9
All liquidations 69209 516770580.5 100.0 100.0

However, when observing flashloan liquidator concentration, the top 10 flash loan liquidating entities make up over 61% of all flash loan liquidations and over 93.5% of all flash loan liquidation volume. This suggests that the liquidators are more concentrated and have more influence on protocol liquidations than observed in Ethereum Aave v2.

image

Dissecting the flash loan liquidations compared to all liquidations over time shows increase in flash loan frequency but decline in flash loan liquidation volume in 2023 when compared to 2022.

image

image

v3 Protocols[2].

Most v3 Aave protocols share similar trends in terms of flash loan liquidator profiles, however the make-up of flash loan liquidations (utilizing the flashloan mechanism on Aave) with respect to all liquidations follow different trends (See table below). Should the liquidator behaviour remain the same, whitelisting flashloan-enabled accounts likely does not add additional market risk. However, any migration to new addresses by flashloan liquidators or change in spec of flashloan contracts used by liquidators would introduce both opportunity costs to liquidators as well as inefficiencies in the market via the whitelisting process. We defer to the community on the choice to whitelist flashloan participants on v3 deployments.

All v3 protocols have high density of flash loan liquidator profiles as follows:

  • On Ethereum, top 6 contribute to 100% of all flash loan liquidation volume
  • The top 10 flash loan liquidators contribute to 99% of all flash loan liquidation volume on Polygon, Arbitrum, Optimism and Avalanche
  • On Avalanche, the top 10 contribute to 98% of all flash loan liqudiation volume

The table below summarizes the flash loan liquidation metrics with respec to the overall liquidation metrics for each chain.

Chain Flash loan Liquidations All Liquidations Flash loan Amount (USD) All Liquidations Amount(USD) Flash Loan Percentage Count All Liquidations Percentage Count Flash Loan Percentage Volume All Volume
Ethereum 10 439 4166.5 16188271.4 2.3 100.0 0.0 100.0
Polygon 1459 11169 1739439.6 19850784.8 13.1 100.0 8.8 100.0
Arbitrum 2106 3564 3884916.2 9265787.8 59.1 100.0 41.9 100.0
Optimism 605 913 6312843.3 7724241.3 66.3 100.0 81.7 100.0
Avalanche 910 6419 3425733.8 35782500.2 14.2 100.0 9.6 100.0

To give an example of distribution of liquiditaros and their frequencies, below is an image of Polygon Aave v3 flash loan liquidator profile.

image

Here, we see high concentration of flashloan liquidators with one liquidator contributing to over 600 liquidations (~41% of all flash loan liquidations).

  1. flashloans in the context of this analysis and discussion mean flashloans that have utilized the flashloan mechanism exclusively on Aave. ↩︎

  2. We have only accounted for protocols with significant TVL (>$50mm) and hence have excluded Fantom and Base v3 instances of Aave. ↩︎

9 Likes
11

definitely not.

a lot of infrastructure and other defi projects have been built around aave’s flashloans and disabling these / whitelisting will mean near certain death for other projects that rely heavily on aave flashloan functionality.

1 Like
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Hi, this is Edson from dHEDGE DAO and Toros Finance. We currently use Aave flashloans for processing withdrawals for all our vaults. If we lost flashloans, this would essentially break our integration with Aave, affecting multiple of our products, and causing depositors to be unable to withdrawal their assets from our protocol for vaults deposited in Aave.

We currently have $4.9M net in Aave V2 (collateral - debt) for a single manager alone (Toros Finance). Our top 2 polygon vaults alone have $13.7M deposited as lending, and $8.8M being borrowed on Aave V2 Polygon (50% of all USDC currently borrowed), with 1.2k unique addresses deposited across both.

On Optimism, we also have delta neutral vaults that depend on Aave to hedge and keep delta neutral, on with ~$1M lent, and $0.5M borrowed.

For closing flashloans on Aave V2, we can support contract calls to migrate to V3. Though, with liquidity concerns. I believe if we migrate now, there’s not enough USDC liquidity available on Polygon Aave V3 to execute that transition. We need ~9M in USDC, and currently only $3.7M USDC is available to be borrowed.

But, I’m also more concerned about the whitelisting of addresses.

Say we create more vaults, do we have to go through the whitelisting process for each new contract? dHEDGE uses a contract factory to generate all it’s vaults. Would it be possible to whitelist all contracts made with this factory? This seems like a lot of overhead if needed to whitelist addresses manually.

For dHEDGE, we use flashloans not for the vault managers, but for withdrawal processing. If those contracts are whitelisted, the vault managers wouldn’t execute flashloans within the vault, but the flashloan would occur if a user is withdrawing from a vault that has open debt that needs to be repaid for the withdraw to finalize.

Please let me know, as this affects a large portion of our products.

3 Likes
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Thanks to all for the feedback.

To be clear no be decision on this topic will be made nor any actions changing current set up executed without extensive visible discussion with the community.

Please encourage all relevant parties to provide their input.

4 Likes
14

V2 flashloan sunsetting should coincide with the entire V2 market shutdown.

From a security standpoint, whitelisting Portal bridges made sense due to the line of credit and trust required in its original implementation. Trust is not required in Flashloans as it has the necessary checks to avoid asset loss (its atomic).

From a strategy standpoint, flashloans should still not be whitelisted as there would be a lot of discouragement from interacting with Aave’s flashloan system. Not to mention the added beurocracy that will slow down innovation. Instead, Aave should be more competitve, not restrictive. Aave still holds supreme in liquidity and resilience and should keep that fact for strategy. To keep its edge, Aave should continue to be an innovator as it has before, not resort to the common restrictive strategies that companies who lost their innovation resort to.

The crypto industry is one of cooperation, competition, and open availability. Its web3, not web2.

1 Like
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It’s a regressive change. Decentralization is one of our fixed tenets.

1 Like
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