Overview
Recent oracle behavior and evolving market structure warrant simplifying valuation for MKR and USDtb to preserve accurate accounting and reduce exposure to thin-liquidity distortions.
- MKR: As liquidity and price discovery have migrated from MKR to SKY, the standalone MKR feed is increasingly less stable and directionally weaker. We recommend adopting a derived valuation approach that anchors MKR to the deeper-liquidity SKY market.
- USDtb: Since USDtb is not used as collateral, short-lived oracle dislocations can introduce unnecessary liability-side accounting volatility. We recommend hardcoding USDtb to $1 to remove transient oracle noise while remaining conservative for the protocol.
MKR
Motivation
Following the MKR to SKY migration, secondary market liquidity and trading activity have shifted toward SKY, leaving MKR with significantly reduced depth across the venues typically relied upon for oracle formation. In this regime, the MKR oracle is more likely to exhibit stale updates, greater deviation under small notional flows, and greater sensitivity to venue-level dislocations.
These risks can translate into significant oracle deviation from the price of the underlying MKR asset and introduce insolvency risk for the Aave market if collateral is overvalued during stress.
However, MKR’s economic value is currently anchored by an open conversion path into SKY at a fixed rate. This conversion path was initially announced as indeterminate; however, that definition has recently been brought up for discussion on the SKY forum. Following the most recent change, which took effect in September 2025, the amount of SKY received per MKR upgraded will be reduced by 1%. The reduction will increase by an additional 1% every three months thereafter, until it reaches 100% in 25 years.
The initial conversion rate specified under the path described is 1 MKR to 24,000 SKY. As such, under a functioning conversion mechanism, any sustained divergence between MKR spot and 24,000 × SKY minus the penalty rate is expected to be arbitraged away (net of operational frictions), meaning that the fair-value reference for MKR becomes the SKY price, scaled by the conversion factor. In this context, continuing to rely on a standalone MKR oracle constructed from increasingly illiquid MKR markets is both unnecessary and directionally inferior from a risk standpoint.
Current Exposure Overview
MKR as collateral remains present but at a low absolute scale. The borrowed-asset distribution against MKR collateral totals approximately $164.52K, in quick reduction over the past 90 days, composed predominantly by stablecoin debt. The largest components are USDT (~$84.82K) and USDC (~$67.47K), with a smaller LUSD component (~$11.5K) and negligible residual balances in DAI (~$723) and USDe (sub-$1). This composition implies that the principal oracle risk surface is the valuation of MKR collateral supporting stablecoin liabilities, where an overstated MKR price can delay liquidations and increase bad-debt probability during drawdowns, while an understated price can generate unnecessary liquidations.
The current highly conservative distribution of MKR-collateralized debt positions means that an MKR price change of up to 30% would trigger minimal liquidations.
Oracle and Price Feed Changes
This proposal is intentionally scoped to Oracle configuration only. The deprecation mechanics that eliminate new exposure are already being handled via caps set to 1, proposed here, and the scheduled move toward a near-zero LTV configuration under the v3.6 recommendation here, which together prevent new leverage from being created while allowing existing users to unwind.
While MKR is being sunset from a risk-parameter standpoint, the protocol must continue valuing MKR collateral and any residual MKR borrow positions using a feed that is operationally maintainable and resilient to low-liquidity artifacts.
The recommended implementation is a derived MKR/USD oracle defined as:
MKR/USD = (SKY/USD) × 24,000 * 0.94
This methodology leverages the fixed conversion rate of 1 MKR = 24,000 SKY and the fact that conversion is available indefinitely; however, it includes a 6% reduction, which is intended to represent the gradually increasing penalty until December 2026.
Further Oracle adjustment recommendations will follow when the introduced reduction is no longer sufficient to fairly represent the MKR conversion price.
USDtb
Motivation
The core motivation for hardcoding USDTb to 1 USD stems from observed mismatches between USDTb’s reported on-chain price and its underlying economic value as a stable asset, occurring alongside relatively thin liquidity on the venues that inform the oracle feed. In particular, we have observed short-lived negative deviations in the USDtb/USD market feed, which appear consistent with the feed being skewed by low-volume prints, transient transaction-level distortions, or other aggregation effects rather than reflecting a true market-clearing price. As liquidity thins, even modest and temporary dislocations can lead to oracle updates that are not representative of the asset’s factual value, while protocol-native whitelisted mint/redeem arbitrage activity has seemingly been inefficiently latent.
From a risk perspective, it is essential to note that USDTb is not used as collateral on Aave V3 Ethereum. As a result, negative oracle moves do not introduce liquidation shortfalls via impaired collateral exits. Instead, the exposure is concentrated on the liability side: if the oracle briefly reports a meaningfully sub-par price, the protocol is forced to treat a transient, low-liquidity oracle print as economically binding, even when it diverges from USDTb’s factual value.
By hardcoding USDTb’s price to 1 USD, Aave explicitly encodes the assumption that short-horizon on-chain price noise is not relevant for risk management for a non-collateral asset. This removes the downside tail risk introduced by transient sub-par prints and prevents brief, low-depth dislocations from translating into protocol-level accounting risk. Moving to a static price effectively neutralizes oracle-driven tails on both sides, while remaining consistent with USDTb’s intended stable design.
In a true fundamental depeg scenario, where USDTb’s backing, redeemability, or market structure is impaired and its market price trades below $1 for a sustained period, the static oracle maintains a conservative posture for the protocol. Debt continues to be booked at 1 USD while the asset’s market value falls. From the protocol’s perspective, this improves resilience: liquidators can source USDTb more cheaply to repay a 1 USD unit of debt, increasing liquidation profitability and reducing the likelihood of bad debt. Borrowers are effectively “overcharged” relative to spot during a depeg, but that asymmetry is protective for the protocol compared to a dynamic oracle that would mark liabilities down in line with distressed, low-liquidity pricing.
Disclosure
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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