Overview
As an additional step to mitigate the risks posed by the Balancer exploit, we recommend the freeze of all of the assets on Gnosis chain by setting their supply and borrow caps to 1.
Motivation
Following the Balancer exploit, the Gnosis team has communicated its intention to temporarily pause the Gnosis canonical bridge in order to maximize the chance of recovery of the assets.
While this change does not impact the collateralization of any of the assets on the chain, it does pose a meaningful risk to the Aave protocol. The pause of the canonical bridge prevents arbitrageurs from maintaining a strong price correlation between the bridged assets on the Gnosis chain and their source chain.
As previously mentioned, price deviations between DEX prices on the chain and the Oracle feeds used by the Aave protocols could cause liquidations of positions temporarily unprofitable, which could lead to accrual of bad debt if the price changes do not revert prior to the price deviation closing.
The current collateral exposure on the Gnosis Aave instance amounts to ~$33.46M, of which ~$22.25M is used to borrow uncorrelated debt.
As the instance utilizes exchange rate oracles for wstETH and sDAI, the correlated debt taken by those assets is unlikely to become eligible for liquidation; as such, it represents a smaller risk during a bridge interruption.
In order to prevent heightened borrowing rates, we will maintain the current EURe supply cap. As it is not enabled as collateral, price dislocations are not expected to present a risk to the protocol.
Specification
The supply cap changes recommendations proposed in this post are temporary and its sole intended function is to limit exposure to the pausing of the Gnosis canonical bridge.
Chaos Labs will review the situation and propose further changes to the caps after the canonical bridge of Gnosis is reopened.
| Instance | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Gnosis | wstETH | 15,000 | 1 | 190 | 1 |
| Gnosis | sDAI | 48,000,000 | 1 | - | - |
| Gnosis | GNO | 180,000 | 1 | 20,000 | 1 |
| Gnosis | WETH | 4,800 | 1 | 3,500 | 1 |
| Gnosis | EURe | 27,000,000 | - | 22,500,000 | 1 |
| Gnosis | USDC.e | 12,000,000 | 1 | 9,000,000 | 1 |
| Gnosis | xDAI | 36,000,000 | 1 | 36,000,000 | 1 |
| Gnosis | GHO | 2,500,000 | 1 | 2,250,000 | 1 |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
Disclosure
Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.
Copyright
Copyright and related rights waived via CC0.