Chaos Labs - Monthly Community Update

Governance
38

February 2026

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

Highlights

Supply and Borrow Caps Reduction Across Low Demand Assets

During February, we recommended a broad-scale reduction of supply and borrow caps across multiple Aave V3 instances in response to sustained, market-wide notional compression and yield compression across stablecoins, LSTs, and LRTs. As lending activity and on-chain yields declined, and as capital continued to migrate toward deeper or more profitable deployments, many assets and instances became underutilized. In this environment, oversized caps provide limited user utility while increasing latent tail exposure, particularly in thinner markets where liquidity can deteriorate quickly under stress.

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Our methodology applied a unified framework to identify markets with persistently low or steadily declining utilization, then right-sized caps to better align capacity with observed activity while preserving operational headroom. In parallel, given ongoing discussions around formal deprecation of certain instances, we recommended precautionary constraints by effectively disabling borrowing through minimal borrow caps to reduce tail risk ahead of any formal enactment.

Revenue-indexed Deficit Offsets for Umbrella

We published a proposal introducing a Risk Oracle framework to update Umbrella’s deficitOffset per reserve as a function of realized liquidation-linked recapture, specifically liquidation protocol fees and SVR revenue attributed to the debt reserve being repaid. The intent is to convert realized liquidation profitability into continuously “earned” first-loss capacity, aligning the DAO’s senior equity buffer with the same liquidation machinery that both generates recurring positive cash flows and occasionally produces deficits under adverse microstructure.

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The proposal is motivated by the observation that liquidation activity exhibits a risk-return profile where frequent, generally positive cash flows can coincide with rare, localized losses, and Umbrella makes the pass-through of those losses mechanically enforceable. Without a systematic linkage between realized liquidation earnings and deficit offsets, Umbrella stakers can be exposed to slashing in regimes where the protocol is net-profitable, creating a risk-sharing profile that is difficult to justify economically. To address this, we propose an oracle that uses conservative reinvestment of liquidation-linked earnings into reserve-level offsets, with on-chain guardrails such as per-update bounds and cooldowns.

Chaos Labs Risk Report: Insights from Recent Market Events (02/02/26)

We published a market event report covering a week of elevated volatility that drove substantial liquidation activity across Aave deployments. Liquidations were concentrated in Ethereum Core, with large daily notional volumes and broad activity across major collateral assets. Over the period, the liquidation engine performed as intended, producing a net-profitable outcome for the DAO through liquidation fees and SVR recapture, while realizing only a minimal deficit that was concentrated in a BAL-related position.

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A key takeaway was that even when the broader liquidation system clears efficiently, isolated deficits can still occur in long-tail assets during sharp moves as liquidity and execution quality deteriorate. The report also highlighted SVR’s meaningful contribution to value capture during the liquidation-heavy regime, reinforcing the role of liquidation revenue streams in strengthening Aave’s resilience over time.

Risk Oracles

Risk Oracle Activity Overview

Risk Oracles continued to scale across the Aave ecosystem in February, executing updates across multiple oracle types and deployments. The most active oracle category during the month was the Pendle Token (PT) Risk Oracle, with 179 total updates, reflecting continued active parameterization needs for PT collateral as these assets evolve with time to maturity and changing market conditions.

Supply and Borrow Cap Oracles executed 34 total updates across a broad set of chains, indicating continued reliance on automated cap management to align capacity with real utilization as demand shifts across instances. Updates were most frequent on Optimism with 9 and Base with 8, followed by Arbitrum with 7 and Polygon with 6, with smaller activity on Avalanche and BNB.

The Variable Rate Slope 2 Oracle performed 29 total updates in February, with the majority of activity occurring on Ethereum with 19 updates and additional activity on Linea with 9, plus a single update on Avalanche. This pattern indicates the oracle’s primary role in responding to utilization stress in the largest and most sensitive markets, where rate volatility and liquidity shocks can have outsized downstream effects.

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Forum Activity

We published the following proposals, updates, and analyses, including risk parameter updates:

Additionally, we provided analysis regarding the following proposals and discussions:

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 across additional chains leveraging Edge infrastructure
  • Ongoing monitoring of SVR and related parameterization
  • Pendle Dynamic Risk Oracle deployment for each PT asset
  • Continued expansion of rate-model automation, including Slope 2 updates driven by utilization stress regimes
  • Preparation and Risk support workstreams related to Aave V4 launch