[ARFC] Risk Parameters for DAI Update

Governance
19

We are supportive of this progression to separate the topics and like many before us, we share the view that sDAI should be excluded from Merit.

Regarding DAI on Aave, there are a few options on v3 to reduce our exposure and not as many options on v2. Generally, we are in favour of limiting Aave users exposure to DAI. We do note, the affects of risk tranches and hierarchy of liability being implemented via Morpho, Spark, Maker and Ethena acting to reduce DAI’s risk exposure, ultimately with the backstop being MKR auctions as the last line of defence.

For instances of Aave v2, we suggest the following:

  1. Gradually reducing the LT for DAI on v2 to reduce borrowing power and exposure
  2. Raising the RF for DAI - this will reduce exposure due to lower deposit yield making DAI becomes less appealing and will have no affect on borrowers (utilisation currently 84%, exceeds the Uoptimal 80% level).

Adjusting the RF higher, will present a more appropriate reward for the protocol given the risk the asset presents. It will further encourage migration to v3 where there are more advanced risk mitigation options.

Note: Setting DAI LTV to v2 is directionally helpful but offers minimal improvement due to the ability to flashloan.

For Aave v3, reducing DAI’s LTV to 0 will not immediately affect the current DAI suppliers who are utilising 42.92% of the Supply Cap. However, it will hinder their ability to increase their existing debt up to the current 77.00% LTV and hinder the ability for future DAI depositors to borrow against DAI. This adjustment dissuades but does not prevent users from depositing DAI. It also does stop users from extending DAI debt, which has a 48.38% borrow cap utilisation, and from initiative new DAI loans.

Reducing the Supply Cap and Borrow Cap to 0 would ensure no future DAI depositors and borrowers are able to join the protocol.

For instances of Aave v3, we suggest the following:

  1. Lowering the DAI Supply Cap and Borrow Cap - this action will reduce potential exposure

Reducing the Supply Cap and Borrow Cap acts to limit Aave’s exposure. Doing so prevents the DAI deposits and debt growing further.

We look forward to @ChaosLabs risk parameter analysis and overall support limiting DAI exposure. We tend to favour limiting exposure at current levels as a first step and then monitoring the situation over time to determine if the LT needs to be revised lower on v3.

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