Some thoughts on the proposal (Disclaimer: I have discussed the topic with Chaos Labs and LlamaRisk due to my involvement in Aave via @bgdlabs. Aside from the context of being an asset listed on Aave, I have no other direct/indirect relation with Ethena):
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Before entering into the topic, I would like to highlight that I have no doubt about both Chaos Labs and LlamaRisk making the recommendation based on what they believe is worth it to at least discuss on Aave, without any type of conflict of interest. For example, LlamaRisk precisely proposed a sUSDe derisking proposal in December, very clearly for the interest of Aave HERE. And it really makes no sense that same doesn’t apply to Chaos.
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In regards to pricing itself, I’d say there are 2 important routes of analysis:
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Oracle vs redeemability. In DeFi lately, we tend to simplify the pricing strategies in assets with redeemability/primary market as “hardcode” the price vs secondary market oracle. The core issue (definitely the main one here) is edge cases decoupling the secondary market versus the real underlying demand for buying the asset at a discount, and boils down to just one question: is there strong economic dynamics on the asset for any price deviation from a reference (e.g. $1) to be purely temporarily? If the answer is yes, “hardcoding” the price to the reference is a safer approach for all depositors of Aave (of the tokens borrowed against sUSDe). If the answer is no, the only option is secondary market pricing, as it is, and iterating with additional protective measures around, like what follows.
To be clear, no matter that Aave uses secondary market pricing, it is already trusting the security of USDe, assuming no permanent loss of ~8-15% happens (with the 92% LT and assuming some positions not going full leverage) -
Being stricter on liquidation situations. The Aave protocol has some high-level principles to risk that should always be respected:
- When borrowing assets, protecting/guiding the borrower to not put his position at risk, with measures like keeping a spread between LTV and LT, or even others like capping oracles on the upper side, to avoid price squeezes.
- When liquidations happen, the full priority protecting the suppliers, and with them everybody in the protocol. This means that if you are a borrower who assumed enough risk in your position, and a liquidation situation arises, the priority of the system will not be anymore not hurting your position, but protecting everybody.
In terms of configurations, this could be reflected in a risk configuration like:
- Slightly lower LTV and LTV, to open the spread of overcollateralisation (currently between 92% and 100%).
- Increasing the LB. Exact parameters are more suitable for the risk providers to recommend, but definitely, the 4% sounds very conservative, potentially even 5 or 6.
Still, these configurations will matter mainly on very edge scenarios of depeg of USDe from $1, and the question is actually how effective they will be then: meaning no LB will help if the asset depegs 10% for a long period, only users deleveraging and strong redeemability. (And we are back in ground zero, concluded $1 recommendation).
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I agree with previous comments that using USDT as a reference is slightly unnatural, simply because even if not substantial at all, it adds risk from USDT. I assume it is due to what is explained in the post of the minting/redeeming activity being USDT-dominated, but generally on Aave we don’t really consider so granularly pairing of liquidity, only size and assets paired being or/and 1) liquid enough 2) correlated with the “origin” token.
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A substantial consequence of hardcoding to $1 is that different to currently, there will be no protection against borrowing whenever a depeg happens on the secondary market (e.g. secondary market reporting 0.97, while Aave 1.00 and people borrowing).
This strategy doesn’t seem economically sound until a low enough threshold is reached, but still, given that currently we have Risk Stewards in place, I would definitely say that a simplified version of a killswitch just setting the LTV of the asset to 0 whenever a let’s say 2-3% is detected on secondary market is appropriate. -
In my opinion, for an asset like sUSDe, the Chainlink oracle should consider more granularly the redeeming dynamics and consequent pricing. Hardocoding to $1 is basically a proxy strategy to consider redeeming liquidity as the sole source, without considering at all gap risk.