Chaos Labs - Monthly Community Update

Governance
26

March 2025

This update highlights Chaos Labs’ activities and proposals in March.

Highlights

Aave <> Chainlink SVR v1. Phase 1 Activation

We recommend activating the first phase of Chainlink’s Smart Value Recapture (SVR) on Aave to enable the protocol to reclaim non-toxic MEV generated during liquidations triggered by Chainlink Price Feeds. SVR uses a Dual Aggregator design, where a single Chainlink oracle network publishes the same price update to two destinations: one to the SVR Price Feed via Flashbots MEV-Share, and the other to the Standard Price Feed via the public mempool. This structure allows Aave to capture MEV value from searcher bidding while maintaining compatibility with existing Chainlink interfaces. If the SVR update is delayed or fails to land onchain, a fallback mechanism kicks in after a configurable delay, pulling the price from the Standard Feed to ensure price availability. This design preserves liveness while ensuring liquidators can’t bypass MEV-Share to avoid contributing value back to the protocol.

We support the deployment of SVR, which we believe will introduce a new revenue stream for Aave while incurring minimal expected losses. Specifically, our simulation using position data from the Aave Ethereum Core market within a selected time window shows that the total expected bad debt remains negligible, even with oracle delays introduced by SVR. Simultaneously, the OEV capture rate is projected to remain around 40–50%, translating into significant protocol revenue. However, to ensure robust risk management, we also recommend several mitigation strategies, including asset-specific volatility assessments, deviation threshold adjustments, and protocol fee tuning for SVR-integrated assets.

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Listing USR

We recommended listing USR on Aave V3’s Core instance based on our technical assessment of its liquidity profile, market adoption, and underlying smart contract infrastructure. We evaluated USR’s volatility characteristics, collateralization parameters, and historical performance to propose an appropriate set of risk parameters—encompassing supply and borrow caps, liquidation thresholds, and interest rate curves—that would protect Aave’s existing markets while promoting USR’s healthy utilization. By integrating USR with these tailored safeguards, we believe Aave can offer users a new stable and robust asset option without compromising the protocol’s overarching risk standards.

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New Deployments

We recommended deploying Aave V3 on INK, Celo, Soneium, and MegaETH based on comprehensive risk assessments that evaluated each network’s security architecture, bridging mechanics, and on-chain liquidity prospects. By proposing tailored risk parameters—covering collateral factors, supply/borrow caps, and interest rate models—we aimed to safeguard Aave’s core markets while facilitating sustainable liquidity growth. For Plasma, we instead advised a cautious approach: our analysis highlighted the need for additional technical details (e.g., whitepaper clarifications, stable testnet performance) before finalizing any deployment recommendation. This distinction ensures that Aave’s expansion to new chains remains aligned with rigorous safety criteria and the protocol’s broader growth strategy.

Risk Oracles

Supply and Borrow Caps

Following the introduction of automated supply cap updates using Risk Oracles, we are able to report on the first month that they have been utilized. As plotted below, they have primarily been active in gradually reducing the supply caps for underutilized assets like FRAX and and DAI. This significantly reduces the manual work required to make consistent cap updates, including lowering the caps of underutilized assets.

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What’s Next

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

  • Supply and Borrow Cap Risk Oracle integration on additional Chains leveraging Edge infrastructure.
  • 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.
  • Umbrella parameterization and methodology
  • Continuous monitoring of SVR and associated parameterization
  • Pendle Dynamic Risk Oracle for each PT asset deployment
  • Circuit Breaker for LSTs and LRTs
  • Interest Rate Curve Automation