[ARFC] Stablecoin Harmonization and Asset Parameters Optimization

Title: [ARFC] Stablecoin Harmonization and Asset Parameters Optimization
Authors: @ACI (Aave Chan Initiative)
Created: 2024-01-03


Simple Summary

This ARFC proposes focusing stablecoin collateral usage on USDT and USDC while setting LTV to zero for less-trafficked stablecoins and long-tail assets. The objective is to minimize risk for the protocol, optimize revenue generation, and align with market demand trends.

Motivation

Aave’s revenue primarily comes from wETH borrowing and stablecoins borrowing. Years of User behavior data in DeFi indicates a low demand for fluctuating assets as collateral except in use-case-specific scenarios (LST/LRT loops for Weth, RPL borrow to deploy mini pools). Based on @ChaosLabs data, only 2.4%, 3.7%, and 5.8% of supplied DAI, USDT, and USDC on Ethereum are being utilized as collateral. We can also note that market demand for alternative stablecoins is less sensitive to borrow rates compared to blue-chip stablecoins like USDT and USDC.

The DAO governance has been lenient in onboarding some collaterals, such as KNC, which currently attracts nearly zero traction (currently used to generate 0.79$ of borrow volume) and generates minimal revenue. Additionally, the asymmetric risk presented by stablecoins, such as during the CRV event (collateral was USDC with very high LT and low LB), highlights the need for optimization considering Risk/reward.

Specification

Proposed Adjustments:

The ACI proposes the following strategy shift:

  1. Focus on USDT and USDC as primary stablecoin collaterals.
  2. Set LTV to zero for alternative stablecoins and long tail assets.
  3. Enable a 3%/week LT reduction for these stablecoins assets, providing ample time for users to react and keep them as passive yield sources or borrowable assets that represent 99% of current user demand and most of protocol revenue.
  4. Propose the following adjusted standardized ReserveFactor categories for Aave assets:
Collateral Type Reserve Factor %
wETH 15%
USDC/USDT 10%
Alternative stablecoins & long tail assets 20%
DAI 25%
  1. Fade out as collateral the following stablecoins:
  • FRAX
  • LUSD
  • EURS
  • agEUR
  • JEUR
  • MAI
  1. freeze (if not already), then slowly offboard the following alternative stablecoins and long-tail assets that failed to gain traction by gradually increasing RF to 99.9%, decreasing LT by 3% per week then applying incremental interestRateStrategies incentivizing users to switch to others collaterals or borrowed asset as the DAO implemented for BUSD and TUSD on Aave V2:
Collateral Type Network
EURS All pools
agEUR All pools
JEUR All pools
MAI All pools
KNC Ethereum
STG Ethereum
BAL All pools
FXS Ethereum
UNI Ethereum
WBTC.e Avalanche

Next Steps

  1. Community feedback and gather consensus on the proposed adjustments.
  2. Proceed to ARFC snapshot stage for formal community sentiment check.
  3. If successful, escalate to AIP stage.

Disclaimer

This proposal is made independently by the ACI.

Copyright

Copyright and related rights waived via CC0

3 Likes

After checking those assets on the different markets I do agree that off boarding those assets for security reasons makes sense. There is little to no demand for those, I was even surprised that LUSD is such a small market. The potential risk vs. potential revenue is not worth it.

I do also agree with the other assets. For UNI it could be that it will be again attractive when there will be staking activated for fee sharing, but then the DAO could decide to onboard it again.

1 Like

Thanks for the proposal @MarcZeller. What is the rationale for increasing the DAI reserve factor? What impact do we expect it to have with respect to relevant users for that asset?

The following proposal has been escalated to ARFC Snapshot.

Voting will start tomorrow, we encourage everyone to participate.

A bit too late but some points from my side:

  • Agree with the strategy of being conservative with stable assets on the collateral side. The market dynamics focusing on the borrowing side are pretty clear, so the collateral power should be way more limited than currently is, and reserved only for really battle tested and big in size assets.
  • Considering the existence of sDAI, I agree that only USDC and USDT should have collateral power.
  • Regarding slowly off-boarding of assets with “collateral nature” and low usage, I think the current proposal is too aggressive for some of them, probably consequence of too much generalisation. My opinion:
    • If a collateral doesn’t cross X amount in US dollars after some time of listing, off-boarding should be started, for example 2 or 3m USD (numbers should be defined by some growth-related party, together with risk providers). Additionally, if debt ceiling is not above certain levels, off-boarding should be aggressive on the collateral side, because it means there is absolutely no demand for the asset (e.g. STG, FRAX).
      Those type of assets are at the moment pure liability for the protocol, with no usage.
    • There is a group of assets with in my opinion healthy dynamics, even if obviously smaller than “big” collaterals like WBTC, wstETH, etc. In addition they are isolated, so I see no reason to do any off-boarding. Thats the case on Ethereum for UNI, BAL, apart from others with bigger size (e.g. 1INCH).
      The point of Isolation Mode on collaterals is precisely assets of that style.
    • Caps should be more reactive. E.g. it doesn’t really make sense to have 10m supply cap and $3m debt ceiling on STG, with 1.53m currently supplied (I doubt it was higher at any point) and a mere 34k of debt ceiling. Again, this is pure liability to the protocol and should be off-boarded immediately.
    • Similar rules (but adapted in size probably) should be applied on all networks.
4 Likes

Following Snapshot monitoring, the current ARFC Snapshot has just ended reaching both Quorum and YAE as winning option with 492K votes.

Next step will be the publication of an AIP.

Following discussion with Aave DAO service provider some elements of the current AIP have postponed enforcement via a second AIP payload to allow more community discussion in the context of an [ARFC-ADDEDUM]

The following elements have been removed from the initial Payload:

EURS freeze & LTV zero on Polygon network
UNI & BAL freeze & LTV zero.

The @ACI will publish shortly an ADDENDUM in this thread with suggested updates to this ARFC, allowing the community to discuss and vote on them.