Chaos Labs - Monthly Community Update

Governance
25

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.

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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.

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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.

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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.

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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.

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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.