Author: Marc Zeller @marczeller - Aave Chan Initiative, Chaos Labs
Date: 2023-08-09
Summary:
This proposal seeks to onboard sDAI as a collateral-only asset into the Aave V3 Ethereum pool. It outlines the specific parameters for integration and aims to create new synergies with the MakerDAO ecosystem.
Motivation:
The recent increase in the DSR (Dai Savings Rate) to 8%—though anticipated to decrease to 5%—presents a unique opportunity for Aave to forge new synergies with the MakerDAO ecosystem. By integrating liquid DSR deposit tokens (sDAI) as a collateral-only asset in the Aave V3 Ethereum pool, Aave can offer users the dual benefit of earning DSR yield while utilizing their assets as collateral. In the context of GHO, this integration would create a yield-generating stablecoin with a higher yield than the GHO borrow cost. It’s important to note that this proposal does not conflict with the DSR integration in aDAI reserve proposal, but rather complements it. However, current engineering constraints make immediate integration difficult in the short-term. Should governance approve this proposal, both sDAI and DAI would serve as reserves in the Aave V3 Ethereum pool, with sDAI primarily used as collateral and DAI as a borrowable asset.
Specification:
We propose the following modifications to the Aave V3 & V2 Ethereum pools:
The Aave-Chan Initiative & Chaos Labs are not affiliated with or paid by MakerDAO to publish this ARFC. At the time of writing, The ACI has large parts of its own treasury in the DSR, intending to use sDAI as collateral to mint GHO.
Next Steps:
Gather community feedback and consensus on this ARFC.
escalate this proposal at ARFC Snapshot Stage
If Snapshot outcome is YAE approved, Escalate to AIP stage
We do not see any increased risk in enabling sDAI as collateral.
However, in the short-run, we are not sure this would benefit GHO as prior to that, we’d need to improve GHO liquidity. Therefore, we foresee an increase in the borrowing on USDC/USDT (as long a borrowing cost permits) - which is positive for Aave nevertheless. In the long-run once the liquidity and parity is met, then we believe this proposal will help support GHO growth.
Thank you ACI & Chaos for bringing this discussion up.
There are obvious benefits to sDAI as collateral which @MarcZeller has brought up clearly.
However, there are risks. Creating a structural scenario where GHO can be minted at a meaningfully lower interest rate than the yield of a stable collateral will put pressure on its peg. Users may mint GHO against sDAI, sell it for (s)DAI, supply it to the protocol, borrow more GHO, and repeat this process in order to increase their yield. This will lead to an inflation of GHO’s supply without corresponding demand, putting pressure on its peg.
This risk could be minimized by listing sDAI in isolation mode (only able to borrow stablecoins with sDAI as collateral) and/or with strict supply caps.
Overall, I am supportive of listing sDAI as collateral, and suggest we work to minimize it’s impact on GHOs peg.
i don’t think GHO peg should be a particular concern at the beginning. With this configuration and the inability to use it as collateral to leverage long (coming soon) it was pretty much clear that peg would have suffered on release. It’s a compromise for growth - trade low interest rates for a temporary discount on the peg. With the possibility to leverage long and better secondary market liquidity the peg will certainly improve
Im totally with you. I was expecting GHO will be released and staying in a range like that. So im not concerned at all, just wanted to highlight that it will improve and its not a bad design or whatever.
Proposal looks good overall. But I think a few of the proposed parameter changes could be adjusted.
This can grow the revenue Aave earns from DAI on v3, but could also keep the yield earned on aDAI further below the DSR yield and lead to a decline in borrowable DAI liquidity on Aave, which is not great. Once aDAI has a mechanism to sweep idle funds to the DSR then this concern wouldn’t be an issue any longer, but before then I think increasing reserve factor could backfire a bit by reducing aDAI market size.
v2 seems to be on a slow but steady path towards being deprecated, with the intention that funds move over to v3 to benefit from more features and better risk controls. Increasing optimal utilization ratio could make this migration more difficult, as there would be less DAI liquidity available to withdraw from v2 and migrate to v3 at any one time. Keeping u_optimal at 80% on v2 while increasing on v3 also makes the v3 market relatively more efficient (lower supply<>borrow spreads) which can serve as an additional incentive to migrate.
IMO it makes sense to keep optimal utilization rate at 80% on v2.
I think it could be interesting/productive to list sDAI as both a collateral and borrowable asset. While demand to borrow sDAI will be low initially (if Aave DAI borrow rate is lower than DSR), we can expect these rates to converge towards each other over time, and once aDAI borrow rate is equal to DSR then it may become economical to borrow sDAI instead of regular DAI.
Example IRM params:
Base borrow rate: 0% (effectively equal to DSR, because sDAI continuously earns DSR rate)
Slope 1: 1% (optimal rate of DSR + 1%)
Slope 2: 75% (max rate of DSR + 76%)
It might even be possible to set up a periphery contract that automatically wraps DAI to sDAI for deposits and repayments, or unwraps sDAI to DAI for withdrawals and borrows.
tl;dr: Proposal is good as is but I think it could be improved by considering above adjustments.
Gauntlet supports onboarding sDAI with the same parameters as DAI and as collateral only. We recommend splitting proposals to onboard sDAI and proposals to change interest rate parameters for DAI and WETH to be separated.
On DAI IR Changes
Echoing @monet-supply, increasing DAI RF from 10% to 20% on v3 may lower DAI supply rate below the current DSR, which may incentivize DAI supply withdrawal. This leads to increased risk of
equilibrium utilization higher than Uopt for DAI, which may decrease available liquidity in the advent of liquidations.
Raising Uopt from 80% to 90% adds risk to the above, due to less liquidatable DAI available.
On WETH IR Changes
Would you be able to provide more color on the rationale for increasing Uopt and decreasing Slope 1 for WETH and how it relates to onboarding sDAI?
Hello, we disagree with these recommendations placing slope 1 much lower than staking APY yield (currently at 4.1% on stETH) as we believe it will lead to equilibrium above optimalRatio, decreasing overall protocol revenue and available liquidity.
If the community supports an AIP with Gauntlet recommendations, it will update the wETH parameters as it is likely Gauntlet AIPs will be proposed to vote & execution after sDAI AIP.
However, we will adapt the AIP payload to reflect Gauntlet’s remarks on achieving 3.8% APR cost slope1 objective by changing the base rate to 0 from 1% and keeping the slope1 parameter unchanged.
This is a fair point and we’ll update payload to keep u_optimal unchanged on V2
we think this could be explored after collecting a bit of market data post onboarding, this can be activated after a few weeks if the onboarding AIP is validated by governance
the market will find an equilibrium point around the optimal utilization ratio. we do not foresee this as a concern but this can be adjusted after collecting market data post-onboarding in a dedicated AIP.
