[ARFC] Upgrade Safety Module with StkGHO

Governance
3

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:

  1. 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.
  2. 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.

6 Likes