At Chaos Labs, we are committed to ensuring Aave’s markets remain efficient by keeping utilization close to UOptimal. At the same time, we highly prioritize the user experience on Aave.
Since the demand started decreasing in December, we have proactively proposed and executed multiple interest rate reductions to align rates with market averages. While it may be tempting to undercut the market or predict future rate trends, doing so comes with significant risks. Reducing rates too aggressively can lead to overutilization, causing highly volatile borrow rates that ultimately degrade the borrower experience and drive users to alternative platforms.
To resolve this issue and drastically improve Aave’s responsiveness to market conditions, we are pioneering the use of Interest Rate Risk Oracles. This solution will enable real-time interest rate updates and allow Aave to adapt dynamically to market demand. By continuously monitoring market conditions and adjusting rates accordingly, Risk Oracles will maximize pool utilization, hence driving up suppliers’ rates while also mitigating the risks of overutilization and sudden interest rate spikes.
In the meantime, the Risk Steward Parameter Change ARFC provides a stepping stone toward greater flexibility by reducing governance time for interest rate updates. With the adjustment of range for Slope 1 to 2% from the previous 0.5%, this will allow for faster reaction while maintaining minimal risk.
We appreciate the ongoing discussions and are committed to refining these mechanisms to benefit both users and the protocol’s stability.