Chaos Labs - Monthly Community Update

Governance
21

September 2024

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

Highlights

WBTC Parameter Adjustment

We first published our recommendations to change WBTC’s parameters to reflect its new custody arrangement. Following community feedback, we aligned with other service providers to recommend parameter adjustments that will balance the user experience with the asset’s altered risk profile.

LTV and LT Alignment

To continue optimizing the protocol and improving the user experience, we published an exhaustive recommendation to align LTV and LT for the same assets across networks. This improved the borrowing power for many assets, including AAVE, LINK, and rETH by increasing their LTVs on some networks. This added, for example, over $4M more borrowing power to LINK on Ethereum at current supply levels.

cbBTC Listing

We provided recommendations to list cbBTC in a timely manner, conducting research before the asset had been listed by conversing with the relevant teams. This allowed Aave to be one of the first lending protocols to list the asset, whose supply has grown quickly and for which we have facilitated cap increases.

What’s Next

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

  • GHO: ongoing recommendations, including updating parameters for GHO on Arbitrum.
  • 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.
  • Implement Chaos Labs Risk Oracles.
  • Analysis and parameter recommendations for new assets and markets.
22

October 2024

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

Highlights

Migration of WETH-WETH Loopers and E-Mode Optimization

We published a set of recommendations to discourage WETH-WETH looping in the Lido instance. This included providing time to deleverage, reducing the LB of WETH outside of E-Mode, removing WETH from E-Mode collateral, restoring the liquidation bonus, and finally increasing the LTV of WETH outside of E-Mode. This was critical, as we found that forced transitions out of E-Mode could trigger $30M in liquidations.

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Gnosis DAO Credit Line Instance

Following a post by ACI, we provided recommendations for a Gnosis DAO credit line instance, a novel instance for Aave. This required the development of ad hoc methodologies to ensure that the credit line remains healthy while also allowing for greater borrowing than would otherwise be facilitated by GNO’s on-chain liquidity.

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ezETH and wstETH Liquid E-Modes

We followed up on our previous listing recommendation to provide new E-Mode categories for ezETH and wstETH, including ezETH/USDS and ezETH/wstETH, alongside optimized wstETH/WETH configurations on L2s. Additionally, we updated our non-E-Mode parameter recommendations to account for these new E-Modes. We also updated our CAPO recommendation to account for the recent distribution of EIGEN rewards in ezETH’s exchange rate.

What’s Next

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

  • GHO: ongoing recommendations, including updating parameters for 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.
  • Further updates on the development of Chaos Labs Risk Oracles.
  • Analysis and parameter recommendations for new assets and markets.
23

November 2024

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

Highlights

Onboard and Enable sUSDe Liquid E-Mode

We published a detailed analysis of sUSDe risks with its current oracle setup, specifically measuring the price deviations of USDe and sUSDe. Additionally, we analyzed the liquidity of the sUSDe/sDAI Curve pool. We used the maximum discount observed below (2.47%) as a guide for setting the LB to 3%. The initial recommendation included USDS and USDC as the borrowable assets; a later recommendation added USDT as another borrowable asset.

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Adjust weETH Interest Rate Parameters on Aave V3 Scroll.

Following Scroll’s TGE, we observed changes in the V3 Scroll deployment, particularly in the weETH and WETH markets. This was largely related to users removing their WETH supply after the Scroll airdrop. We recommended reducing weETH’s Slope 1 to a level where borrowing weETH against WETH becomes profitable, allowing users to arbitrage rates and reduce WETH’s without depositing new supply.

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Deployment of Aave on Linea

We completed an analysis of Linea, including its technical architecture, its ecosystem and market, and its DEXes, tokens, and oracles. Ultimately, we found that it is appropriate for Aave to create a new deployment on Linea. Using historical liquidity, we provided recommendations for listing parameters for six assets. We also provided parameters for an ETH-correlated E-Mode and a wstETH/WETH E-Mode with more aggressive parameters.

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Add PAXG to Aave V3 Main Instance on Ethereum

Chaos Labs conducted a detailed technical review of PAXG, which represents direct ownership of physical gold. The listing was complicated by the fact that PAXG is tradable 24/7, differing from the trading hours of the underlying gold. This causes deviations from the gold oracle price, which is not updated on the weekend. We observed a 22.2% divergence between the PAXG and XAU oracle prices in April 2024. Ultimately, we recommended using the XAU market price oracle, finding that it acts as a reduced LTV during upside deviations and it is statistically improbable for bad debt to accrue during downside deviations based on the historical performance of gold.

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What’s Next

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

  • GHO: ongoing recommendations, including updating parameters for cross-chain GHO.
  • Parameterization for new Liquid E-Modes.
  • 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.
  • Further updates on the development of Chaos Labs Risk Oracles.
  • Analysis and parameter recommendations for new assets and markets.
24

January 2025

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

Highlights

sUSDe and USDe Price Feed Update

We published two highly detailed analyses of sUSDe/USDe price feeds, recommending that they be switched to USDT price feeds. Our analysis found that USDe’s fundamental value is closely linked to USDT, as the majority of its perpetual hedges are denominated in USDT. We presented numerous scenarios, including exchange failure, finding that pricing USDe according to USDT would lead to preferable outcomes for the protocol and users.

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sUSD Risk Parameter Adjustments

Following a depeg of sUSD, we moved rapidly to recommend a decrease in its supply and borrow caps to prevent growth in the market. As an additional step, we later analyzed recent activity in the market and sUSD’s peg dynamics and mechanism design. We found that its current economics had contributed to a destabilized peg, even as it remained over-collateralized. As a result, we recommended setting sUSD’s LTV to 0%, as well as reducing the LTV and LT in the Optimism Stablecoins E-Mode.

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ggAVAX Listing

We recommended listing ggAVAX, an AVAX LST that utilizes MiniPools, a relatively unique mechanism that required further analysis. We had previously analyzed the asset, finding that its withdrawal system could pose a problem, as some tokens were locked for extended durations. Upon analyzing again, we found that this dynamic had changed, and average lock duration had dropped significantly. This fact, coupled with an analysis of the asset’s market pricing relative to its exchange rate, led us to recommend listing the asset with an E-Mode to facilitate leveraged yield strategies.

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Deploy stataUSDC and statUSDT GSMs on Ethereum

We responded in favor of a proposal to migrate existing USDT and USDC GSMs on Ethereum to their stataToken counterparts. We noted that, in a previous analysis, we had supported the proposal to use tokens representing deposits on Aave in GSMs. Upon another analysis, we reiterated this support, finding that there was always substantial borrowable liquidity in the markets in question.

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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.
  • Continuous optimization of risk parameters on all V3 deployments.
  • Analysis and parameter recommendations for new assets and markets.
  • Continuation of the V2 risk parameter updates to gradually reduce capital efficiency across V2 collateral assets.
  • Parameterization for new Liquid E-Modes.
  • GHO: ongoing recommendations, including updating parameters for cross-chain GHO.
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.
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