Chaos Labs supports the above proposal for the following reasons:
- Enhanced Liquidity: The incentive program aims to increase PYUSD deposits to 75M PYUSD, boosting liquidity on the Aave Protocol, as the PYUSD market on Ethereum Main Market has shrunk in recent months.
- Controlled Incentives: Capping rewards at 4% APR up to the 75M PYUSD threshold and distributing them pro-rata thereafter provides a reasonable milestone for the protocol to reach, after which growth may be expected to slow.
- Anti-Farming Measures: The eligibility criteria penalize holding undesired debt tokens, discouraging reward farming through PYUSD-PYUSD looping and ensuring rewards go to organic liquidity providers, increasing the stickiness of deposits. We note that Trident Digital and PayPal have reserved the right to amend the list of Undesired Debt Tokens; we find that this does not materially increase risk related to this proposal. However, in the case that a large supplier is borrowing a non-PYUSD token against their PYUSD deposit, and Trident/PayPal decide to add the borrowed token to the Undesired list, the supplier may withdraw and create rate volatility.
- Risk Parameters Adjustments: Any further adjustments to risk or borrow rates will be approved by Aave DAO’s Risk Service Providers. The collateral parameters in this ARFC are appropriate for PYUSD, a stablecoin with strong peg adherence.
PYUSD volatility relative to USD
- Cost Sharing: Splitting the 14% APR cost of the PYUSD/GHO Elliptic Liquidity Pool with Trident Digital reduces the financial burden on the Aave DAO. If liquidity providers hold GHO debt, the net cost to the DAO could decrease further.
- Defined Duration and Metrics: A clear six-month timeline and specific performance targets allow for better straightforward assessment of the program’s performance.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this post.