LlamaRisk supports this proposal as we recognize that the benefits of this upgrade outweigh the various risks. Nonetheless, there are some unresolved questions we would like to see addressed.
Benefits of this upgrade
To begin, we are particularly fond of the elegance of Umbrella. The incentives engine enhances capital efficiency and aligns incentives more effectively, with its flexible design facilitating reaching target coverage amounts for individual markets. Additionally, it reduces reliance on third-party components such as the Angle Merkl distributor. We also value that Umbrella will likely reduce sell pressure (often with thin liquidity) on $AAVE and that the process is now autonomous. In the past, there has been some discussion on which specific conditions would justify using the safety module, and this programmatic approach will likely reduce uncertainty. This should also drastically speed up the process in which depositors are made whole, which should mitigate risk. Finally, users should appreciate the option for additional aToken yield without directly accessing leverage. These factors increase Aave’s attractiveness and may result in increased TVL and improved user confidence.
Caveats of this upgrade
This upgrade increases complexity. It will fragment reserve liquidity more than the current configuration, with some markets potentially being inefficiently overcollateralized and others being inadequately overcollateralized. Dynamic rewards for stakers may also decrease attractiveness. Umbrella’s automatic resolution may result in unintended consequences due to its relatively novel nature. We look forward to reviewing the technical implementation details. As with all protocol changes, it’s important to consider the introduction of new smart contract risks and additional governance responsibilities. Some $AAVE holders may also dislike the decreased utility of the token. Additionally, transitioning from the Safety Module to Umbrella will require comprehensive user education and communication and may result in temporary safety coverage reduction.
Clarifications
- Is there a clear role for stkAAVE in the future? We are unsure of its utility moving forward.
- What are the foreseen parameters that will be introduced? As a risk service provider, we imagine weighing in on the per-market target coverage amounts.
- We assume the staked aToken will have a cooldown period to prevent significant outflows when market conditions are more conducive to creating bad debt. Will this cooldown period be parameterizable per market?
All in all, we support this proposal given the caveats we find less important than its benefits. We want to thank @bgdlabs for the careful consideration, development, and socialization of this idea.