After sync with DAO service providers, AIP 366 has been rerun via AIP-385 and adopted by governance
This proposal now only focus on creating the StkGHO. To allow readers context, text has not been modified even if implementation will not reduce emissions.
Title: [ARFC] Upgrade Safety Module with StkGHO
Author: Marc Zeller - ACI (Aave Chan Initiative)
Date: 2023-11-21
Summary
This ARFC introduces an enhancement to the Safety Module by integrating a GHO Safety Module. This new category aims to mitigate risks using GHO’s stablecoin attributes for potential shortfall events within its ecosystem. It also reduces the Safety incentives for StkAAVE and StkBPT.
Motivation
AIP-366 was adopted by governance to reduce the safety incentives of StkAAVE and StkBPT, but an implementation bug made the AIP execution impossible. After discussion with DAO service providers, it was decided to bundle the re-run of 366 with the creation of the GHO safety module and the StkGHO asset.
The GHO Safety Module will fortify the Aave Protocol’s resilience by adding a stablecoin asset, which is inherently less volatile than AAVE. This strategic move diversifies the Safety Module’s capacity to absorb shocks from various risk vectors in case of shortfall events.
The GHO Safety Module will target a liquidity pool of 9M GHO with an APR range of 12-15%, achievable with a daily emission of 35 AAVE/day over a 90-day period. The module will have a slashing rate set at 100%, meaning the entirety of the deposits could be utilized in a shortfall event, with socialized coverage among StkGHO holders. The cooldown period is adjusted to 10 days, which is suitable for a stablecoin.
Specification
Revised Safety Module Emissions Rate:
Asset
Previous Emissions
Proposed Emissions
StkAAVE
550 AAVE/day
385 AAVE/day
StkBPT
550 AAVE/day
385 AAVE/day
StkGHO
N/A
35 AAVE/day
GHO Safety Module Parameters:
Target Liquidity: 9M GHO
Target APR: 12-15%
Emissions Period: 35 AAVE/day over a 90-day cycle
Slashing Rate: 100%
Cooldown Period: 10 days
Next Steps
Gather community feedback on this ARFC.
If consensus is achieved, move this proposal to the ARFC snapshot stage.
If the ARFC snapshot outcome is YAE, proceed to the AIP stage.
Disclosure
The Aave-chan Initiative is not presenting this ARFC on behalf of any third party and has not been compensated for creating this ARFC.
After careful consideration, Chaos Labs supports the introduction of GHO with the into the Safety Module with the proposed $9M target liquidity.
Below we present our considerations for supporting the addition of GHO to the SM:
SM Diversification: Incorporating GHO into the Safety Module, as the original post suggests, provides essential diversification of the module’s asset base, thereby minimizing its overall risk exposure. This addition strengthens the SM’s resilience against fluctuations in more volatile assets, which could otherwise compromise its operational efficacy. Moreover, such diversification is key to the long-term viability of Aave’s Safety Module, rendering it more robust against the failure of individual assets or broader market declines.
Increased Utility for GHO: The integration of GHO into the Safety Module with the proposed emission offers an attractive yield, increasing the utility of GHO within the ecosystem. This move aligns with our vision of fostering competitive and sustainable growth for GHO.
While the advantages above are clear, it’s crucial to acknowledge the potential challenges of utilizing GHO for covering shortfall events. A significant concern arises if GHO experiences a depeg in secondary markets following a shortfall event. Utilizing GHO from the SM in such circumstances could intensify selling pressure, exacerbating the depeg. This situation might also trigger increased redemptions of GHO tokens, impacting Aave’s TVL in volatile market periods. While this scenario is not very likely, its potential impact could be substantial.
Moreover, incorporating GHO into the SM might redirect GHO liquidity away from AMMs and other liquidity sources, which are key for executing liquidations. This shift necessitates careful monitoring and potential adjustments to GHO’s parameters within the SM to ensure balanced liquidity distribution and effective market functioning.
Conclusion
Taking into account the discussed benefits, particularly the additional utility brought by GHO, we support this proposal along with the recommended parameters. However, in light of the outlined potential risks, we emphasize that future modifications to these parameters, especially the target liquidity of GHO in the SM, should be preceded by a thorough and comprehensive analysis to ensure continued stability and efficacy.
Would it make sense to have like an emergency plan? In case GHO depegs some part of the treasury could be allocated to buy GHO from the market to stabilize it. At least in the very beginning and monitored by the GLC.
And to further incentivize AMMs and liquidity sources the GLC/TL & Karpatkey have to figure out a way to let this area still grow besides the SM.
Generally I think it’s a reasonable Idea. If the bad debt event results in GHO bad debt there would not be need to sell as stkGHO can directly be used to repay.
That said i think it should not be considered before there’s a GSM live (no idea what’s the status on that) - without a GSM I would expect GHO to exceed peg, potentially hurting users.
Introduction of GHO into the SM could create a demand vector for GHO. There are some other considerations that could become important as well.
GSM reserves could need replenishing.
Supposing GSM were active, depegs in GHO during a drawdown could bring about unidirectional reserve changes in the GSM.
Users receiving GHO from the safety module may swap out into USDC/USDT via the GSM.
stkGHO as a GHO demand vector could become less effective in the future.
stkGHO may be a large demand vector for GHO in the beginning because stkGHO in safety module yield is large → stkGHO cap could get filled quickly → high rewards may make cap usage sticky → less chances for new users to participate in stkGHO → stkGHO as a GHO demand vector could become less effective down the road.
Raising caps for stkGHO in safety module may need to balance and factor in migration of external liquidity.
Following the successful adoption of AIP-385 and the YAE outcome of the snapshot, this proposal seeks to update the launch parameters of StkGHO to align with the Aave DAO’s strategic objectives and feedback from service providers.
Specification
The StkGHO asset is set to enhance the Aave Protocol’s Safety Module by utilizing GHO’s stablecoin characteristics. After technical preparations and consultations, the following parameter adjustments options are proposed:
Option A
Parameter
Current Parameters
Proposed Parameters
Cooldown
10 Days
15 Days
Budget
35 AAVE/day
100 AAVE/day
Option B
Parameter
Current Parameters
Proposed Parameters
Cooldown
10 Days
20 Days
Budget
35 AAVE/day
50 AAVE/day
The proposed changes are intended to optimize the effectiveness of StkGHO in its role within the Safety Module.
Next Steps
Conduct a snapshot vote to confirm the community’s agreement with the proposed changes.
Implement the parameter updates in accordance with the snapshot results.
Disclosure
The Aave Chan Initiative has not been compensated for creating this proposal and is acting independently on behalf of the Aave community’s best interests.
In my opinion these changed parameter recommendations are a bit arbitrary.
Why would stkGHO(a realtievly stable token) have a shorter cooldown then a volatile asset.
In the reality we live in, for a slashing to ever happen there will be at least 5 days of governance procedures + some amount of time for pre-procedures (discussion/implementation) for a slashing to happen.
Dumb actors will have a ~40% chance to leave before the slashing (by just cooling down periodically) and smarter actors will have even a bigger chance of leaving the system (given that events that could lead to slashing usually have some noise in advance - e.g. curve incident).
Therefore i don’t understand why the cooldown proposed is smaller then on the other stk tokens (where it’s 20 days).
Regarding the rewards I find it a bit arbitrary to tripple the original proposed rewards.
To me this seems to be a quite dangerous development.
100 AAVE/day rewards might push GHO above peg, disrupting liquidations (given aave’s constant 1USD pricing of GHO). This will especially be true, when the borrow and bucket cap might be fully utilized, as they now are for a few weeks. Adjusting the rewards is a relatively easy procedure contract wise (as it was done before for stkABPT and stkAAVE) - wouldn’t it be a better strategy to start with the originally proposed 35 and adjust in a future proposal if needed?
Would highly appreciate if the snapshot would have the option for only amending the cooldown.
Im in the same camp like @sakulstra. Having a shorter cooldown for a stable asset doesn’t make sense or if it makes, i would love to hear the argument for it.
Imho all assets should have the same cooldown. At least I don’t see the rationale behind having different cooldowns.
I would also say start with the original proposed rewards. If they aren’t sufficient enough to capture enough user and stkGHO then it could be easily adjusted by governance till we find the sweet spot. Better to start low than too high.
My expectation would be that when the SM goes live, ppl will buy GHO on secondary markets and stake it. GHO can currently not be minted as the borrow cap is reached - idk how fast risk providers can react to a liquidity crunch, risk stewards can only be used once every 5 days.
So based on that my assumption would be that GHO will exceed peg when the rewards are high, at least temporary.
GHO for borrowing is statically priced as 1$ so if GHO would trade above peg, liquidators lose money on the $ as every 1$ of repayed GHO would earn them less than a $ of collateral(+ bonus).
Doing some milk math:
100 AAVE * 110$ * 365days = ~4M$ of rewards per year
So with 50M stkGHO rewards would still be at 8%.
Even the now proposed 50AAVE in the amended proposal by seem a lot me - if all liquidity currently in circulation would stake in stkGHO rewards would still be at ~6%.
But 6% would be decent imo.
We need to be competitive vs. LPing where there is no cooldown. Combining the cooldown with this yield GHO should be able to convince people staking GHO in the SM instead of being an LP somewhere. These are obviously costs for the DAO but the rewards coming from GHO would be even better. And the rewards could be replaced with something else in the future.
I would assume that there is a large portion of this GHO that actually is either waiting for StkGHO, meaning some of these balances would move to StkGHO.
Second, some of these balances were accrued over the past 6 months at different ranges, so would assume that in case of overpeg, there would be natural movements out of GHO as well since overpeg creates an exit opportunity. Given the time frame GHO has been below peg (due to the focus on growth vs. peg over the last months), I would see this as a fair flow.
Regarding the annualized cost. The DAO could adjust the incentives based on the success of the peg. If the peg is achieved, these incentives could be lowered even within few months. Spending to secure a GHO peg would unlock new doors for GHO, i.e. more liquidity, collateralization and new markets.
GHO vs LP pools. Indeed as @EzR3aL pointed out, the PL pools do not have cooldown, neither same risk level (loosing all your GHO in StkGHO in case of shortfall) as with stable LP pools. Hence whether the cooldown is 10, 15 or 20 days, the risk profile is higher and yield would need to be much more attractive compared to the stable LP pools.
6% seems falling short as a GHO holder when Uniswap V3 pool yields 7.9% - 7.9% on GHO (no lockup) and Balancer 4.64% - 11.56% (the higher side with rewards would be the factual yield). Also non-GHO holders would not even bother as they can yield 6-7% with USDC at Aave V3 without lockups.
Something to consider is that the Aave DAO snapshotted GHO Stewards which brings agility for the bucketsize and borrow rate. Worth considering implementing it in the same AIP for 90 days to solve the concern @MarcZeller ?
6% seems falling short as a GHO holder when Uniswap V3 pool yields 7.9% - 7.9%
6% would be if 100% if existing GHO would be staked, with aave price staying around 100$.
If that turns out to be the reality, it also means there’s 0 other usecase for GHO which would be quite sad I guess.
GHO vs LP pools. Indeed as @EzR3aL pointed out, the PL pools do not have cooldown, neither same risk level (loosing all your GHO in StkGHO in case of shortfall) as with stable LP pools. Hence whether the cooldown is 10, 15 or 20 days, the risk profile is higher and yield would need to be much more attractive compared to the stable LP pools.
I’m not sure if that is true.
GHO as a SM can only really be good for covering GHO debt positions as in this case the DAO could directly repay debt, to liquidate non-GHO collateral.
GHO has a quite good track record of not keeping peg, so I guess it’s irrational to believe that it would be good to cover any non-GHO debt. The w(st)ETH/AAVE LP while not being perfect either, seems to be a much better candidate for such cases.*
So stkGHO holders, in my understanding basically secure GHO borrowers, which for the most part will be the same ppl(no so risky in my opinion).
*Actually this should be probably sth that’s well defined somewhere before stkGHO goes live as otherwise a shortfall will probably first start a discussion about which SM to use making the SM completely useless.
totally agree that this has to be outlined before voting starts if there really is some distinction. As I understood it from previous discussions it’s just another part of the SM of AAVE as a whole and not restricted to GHO related issues.
Very happy to finally see some progress in regards to GHO’s long term growth and a path to peg.
I agree with Stani here, this is fair flow and could even help capitalize the GSM in case of an overpeg.
100% agree here. Peg is vital for long term trust and growth, especially in this highly liquid and competitive environment. It is quite clear that GHO will never be able to grow significantly without it and it has been proven since launch now. I highly welcome this proposal and look forward to the eventual GHO supply cap raise that will surely ensue if this proposal is successful.
We supportive of Option B for the following reasons:
As pointed out by @sakulstra , there is no need to shorten the cooldown period compared to stkAAVE or stkABPT.
The current APR in the Stablecoin market is trending above 5.0% (aUSDT 6.2%, sDAI 5.0%, sFRAX 5.4%). To infuse new appeal into the market and generate buying pressure for GHO, stkGHO would need an APR of over 10%, which is twice the current APR in the Stablecoin market. Therefore, we believe that an emission amount of 50 AAVE per day is appropriate.