title: [ARFC] USDT Risk Parameters Update Aave V3 ETH Pool
author: Marc Zeller, Aave-Chan Initiative (ACI)
date: 2023-06-06
Abstract
This ARFC proposes an update to the risk parameters for USDT in the Aave ETH V3 pool, enabling it as collateral.
Motivation
This proposal aims to unlock the potential of USDT as collateral within the Aave ETH V3 pool. By aligning the risk parameters of USDT with those of USDC, we anticipate an increase in borrowing power for users. This change is expected to stimulate borrowing volume on Aave, thereby contributing to the protocol’s revenue. The activation of collateral power for USDT is a strategic move towards creating a more dynamic, efficient, and profitable liquidity environment within the Aave ETH V3 pool.
Specification
The following table outlines the proposed risk parameters for USDT in the Aave ETH V3 pool, which will replicate the risk parameters of USDC:
Parameter
Current Value (USDT)
Proposed Value (USDT)
Current Value (USDC)
LTV
0%
74%
74%
LT
0%
76%
76%
LB
0%
4.5%
4.5%
Next Steps
Gather feedback from the community and risk service providers.
If consensus is reached on this ARFC, the proposal will be escalated to the ARFC Snapshot stage.
If the ARFC Snapshot is successful, the proposal will be escalated to the Aave Improvement Proposal (AIP) stage for final approval.
Disclaimer
The Aave Chan Initiative has not been compensated by any third party for publishing this ARFC.
As we’ve recommended before, from a liquidity and market risk perspective, we support enabling USDT as collateral. Regarding the specific parameter recommendations, we support the proposal to list with the same parameters as USDC. Please note that there is a pending Chaos proposal to increase the LT and LTV of USDC on V3 Ethereum, which has passed Snapshot and awaiting AIP.
However, it’s important to note that the primary concern, as mentioned in the various governance discussions in the past, is the counterparty risk. Ultimately, the community must determine its stance on this issue and decide whether to enable USDT as collateral and outside of Isolation mode. If the community is supportive of this, the discussion should be expanded to enabling USDT across the other Aave deployments too.
depending on timeline of proposals, the current ARFC will be adjusted before escalation to snapshot or risk parameters can be adjusted later via another AIP
I’m nearing a decade in crypto now, and since day one, I witnessed some people build a whole persona telling you how bad USDT is, and it will be the doom of crypto.
Facts and data just don’t back this vision, and I think it’s time for Aave to move beyond this and treat USDT for what it is: A large, liquid, and peg-resilient stablecoin with a sizable audience and market demand.
From a market risk perspective, enabling USDT as collateral with USDC parameters can increase revenue, as seen from USDT collateralization on Aave v3 Avalanche and Arbitrum. Gauntlet has not quantified the centralization risk associated with USDT so cannot give any color on the likelihood, extremity or timeframe of a USDT de-peg. If the community has a more conservative risk preference, they may choose not to enable USDT collateral. If they wish to enable collateral conservatively, they can elect to put USDT in isolation mode with a $5 million debt ceiling. If they have an aggressive preference, they can elect to enable USDT collateral at USDC parameter settings. As with other pools, we recommend dynamically optimizing parameters after the pool is initialized and market conditions change.