February 2025
This update highlights Chaos Labs’ activities and proposals in February.
Highlights
Aave V2 Deprecation Update
As the protocol continues its migration away from V2, we conducted an analysis of V2 markets, including the bad debt distributed by asset. We found that virtually all of the bad debt is on Ethereum, and AMPL and BUSD account for a high share of the bad debt. Based on these findings, we recommended reducing the interest rate for markets in which bad debt represented the majority of borrows to 1%. We also recommended disabling new borrows for all V2 assets.
Insights from Market Events
We published multiple timely updates on market events, the first being the high volatility at the beginning of the month, and the latter being the Bybit exploit. The Bybit exploit was of special interest given Ethena’s use of the exchange. However, our detailed analysis found that Ethena continued to process redemptions effectively, minimizing the observed depeg, especially on chain. Ultimately, there were six liquidations during the event, with $22M of sUSDe collateral seized.
Onboard tBTC to Aave
We conducted an analysis of tBTC, finding that it uses threshold cryptography to distribute key generation among 100-node signer groups, each requiring a stake in T tokens. We observed that its security relies on a (51,100) threshold scheme and strict slashing rules, ensuring no single entity controls private keys, despite the potential for manipulation if excessive stake was accumulated. We concluded that market analysis showed stable liquidity and volatility parameters, supported by a limited pool of 35 whitelisted operators.
Risk Oracles
Supply and Borrow Caps
Building on the integration of Aave Generalized Risk Stewards, we went live with the Supply and Borrow Cap Risk Oracle, which automates the generation and application of cap recommendations for Aave, leveraging a proven simulation engine that has successfully supported manual cap adjustments through the Risk Steward for years. Depending on whether the cap utilization surpasses or falls below specific thresholds, either the cap increase or cap decrease simulation can be triggered, in addition to the frequent time-based triggering of simulations for all respective markets. The simulation then determines the optimal new cap value based on a range of risk metrics. The introduction of Risk Oracles will significantly reduce operational overhead and allow for faster response to changing cap utilization.
The chart below shows the amount of supply and borrow cap changes since October 1, 2024.
Pendle Oracle
We proposed a Risk Oracle system that integrates a volatility-structured pricing mechanism for Pendle’s Principal Tokens on Aave, ensuring manipulation-resistant rate updates and a killswitch for minimum price scenarios. This includes a dynamic liquidation threshold and bonus that adjusts as the PT nears maturity, safeguarding against tail risks accounting for the associated duration risk within the asset.
- We published the following proposals and updates, including risk parameter updates:
- [ARFC] Chaos Labs Risk Stewards - Increase Supply Caps on Aave V3 - 02.03.25
- [ARFC] Aave V2 Deprecation Update - Disable New Borrows, IR Curve and Reserve Factor Adjustments
- Chaos Labs Risk Report: Insights from Recent Market Events - 02/03/25
- [ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 - 02.05.25
- [ARFC] Chaos Labs Risk Stewards - Increase Supply Caps on Aave V3 Prime - 02.06.25
- [ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 - 02.11.25]([ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 - 02.11.25)
- [ARFC] Chaos Labs Risk Stewards - Increase USDS Supply Cap on Aave V3 Ethereum Core - 02.12.25
- Chaos Labs Risk Stewards - Increase Supply Caps on Aave V3 - 02.12.25
- Chaos Labs Risk Stewards - Decrease Stablecoin Borrow Rates on Aave V3 - 02.13.25
- Chaos Labs Risk Stewards - Decrease Stablecoin Borrow Rates and Increase Supply and Borrow Caps on Aave V3 - 02.17.25
- Chaos Labs Risk Stewards - Increase Supply Caps on Aave V3 - 02.18.25
- [ARFC] Pendle Principal Token Risk Oracle
- Chaos Labs Risk Stewards - Decrease MKR Borrow Cap on Aave V3 - 02.19.25
- Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 - 02.20.25
- Chaos Labs - Update on Bybit Security Event and USDe Market Reaction
- [ARFC] Chaos Labs Risk Parameters Update - AUSD on V3 Avalanche
- Additionally, we provided analysis regarding the following proposals and discussions:
- [ARFC] Onboard wrsETH to ZKsync V3 Instance
- [ARFC] Launch GHO on Base & set ACI as Emissions Manager for rewards
- [ARFC] Update USDS & GHO Borrow Rate
- [ARFC] Prime Instance - Restore ETH LTV
- [ARFC] Onboard pufETH to Aave V3 Core Instance
- [ARFC] Deploy stataUSDC GSM on Base
- [ARFC] Core & Base - BTC Correlated Asset Update
- [ARFC] Update AAVE Token LTV/Liquidation Percentages
- [ARFC] Add sUSDE to Aave V3 Base Instance
- 2025-02-18 - USDS & GHO Borrow Rate Update
- [ARFC] Deploy Aave v3 on Sonic
- [ARFC] Add bCSPX to Aave V3 Gnosis Instance
- [ARFC] Onboard tBTC to Aave v3 on Arbitrum
- [ARFC] Add EURC to BASE Aave V3
- [ARFC] Onboard rstETH to Aave V3 Prime Instance
- [ARFC] Adjust Risk Parameters for Aave V2 and V3 on Polygon
- [Risk Stewards] - Reduce wstETH Borrow Rate
- [ARFC] BGD. Aave ClinicSteward
What’s Next
In the coming months, the Chaos team will continue its focus on the following areas:
- Risk Oracle integrations leveraging Edge infrastructure.
- Continuation of the V2 risk parameter updates to gradually reduce capital efficiency across V2 collateral assets.
- Parameterization for new Liquid E-Modes.
- Continuous optimization of risk parameters on all V3 deployments.
- Analysis and parameter recommendations for new assets and markets.
- GHO: ongoing recommendations, including updating parameters for cross-chain GHO.