Chaos Labs - Monthly Community Update

Governance
15

February and March 2024

This update highlights Chaos Labs’ activities and proposals for February and March.

Highlights

  • We published a framework for setting the relevant parameters for CAPO - correlated asset price oracle, referring to the expected annual growth of a correlated asset, to deter against unexpected, artificial inflation in the underlying staking rate. We provided initial CAPO recommendations, which have been implemented for all relevant assets on Aave V3.

  • We analyzed how WETH interest rates on Ethereum, Arbitrum, and Optimism were affecting borrowing demand. This included examining the correlations between stETH and WETH APY. We found that the rate of decrease in borrow APY over time outpaces that of the stETH APY and concluded that when stETH APYs are high, borrowers attempt to extract as much revenue as possible, leading to convergence at lower yields. On the contrary, when stETH APYs are low, borrowers and ETH borrow APYs tend to be less aggressive with looping, perhaps due to theoretical scaling in the interest rate requiring smaller growth to become unprofitable, leading to the effective yield scaling higher than instances when stETH APYs are high. This, in turn, leads to less efficient markets and larger spreads when ETH staking yields are low. As a result, we recommended that Arbitrum and Optimism reduce slope1 to enhance utilization rates and revenues.

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  • We proposed increasing GHO’s minting cap from 35M to 40M following an analysis of GHO. The asset’s liquidity and use cases have been bolstered by the GHOTHENA liquidity pool on Curve, which currently holds 17% of its circulating supply. Additionally, the doubling of stkGHO emissions alongside Interest Rate (IR) adjustments improved peg stability and warranted a cautious increase to GHO’s minting cap.
  • Following an analysis of all markets, we proposed an increase in stablecoin IR parameters across all Aave deployments. Following the implementation of an AIP which increased Slope1 to a minimum of 6% across all stablecoin deployments, we observed volatility in borrow rates, spurring us to recommend a further increase of the Slope1 parameter to stabilize borrows under the UOptimal point. Following our analysis, we offered a conservative and aggressive recommendation. These recommendations were updated the following week after sDAI’s APR was increased from 5% to 15%. We further recommended an increase in stablecoin UOptimal from 90% to 92%.

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What’s Next

In the coming months, the Chaos team will continue its focus on the following areas:

  • GHO - ongoing recommendation, including analysis of cross-chain GHO.
  • Continuation of the V2 risk parameter updates to gradually reduce capital efficiency across V2 collateral assets.
  • Continuous optimization of risk parameters on all V3 deployments.
  • Chaos Labs Risk Oracles
  • Analysis and parameter recommendations for new assets and markets.