[Discussion] Safety Module

[Dydymoon]

Hey everyone, thanks for the interesting feedback !

While this post is focusing on analysis and a high level vision of the potential improvements to evaluate the community interest; the issues outlined above led us to work on a strategy improving the SM mechanisms & efficiency, as well as GHO & AAVE liquidity, which will be posted in detail on the forum in the coming days.

However to give some context, this proposal will considers to:

• Implement several “modules” for each asset category & Update the slashing parameters
• Diversify assets supported in the SM, initially focusing on Aave related tokens and liquidity
• Improve the rewards management with gauges on smBPT assets to avoid incentives dilution
• Optimize strategic voting power by moving the distribution for part of the current SM reward budget to vote incentives, leveraging the premium compared to liquidity mining.
• Implement Aura contracts to the SM

Overview of the proposal design:

As mentioned in the analysis, the main goals are increasing the asset diversity and capital efficiency of the funds deposited in the SM, reducing the insurance cost and the AAVE dependence in case of shortfall event, and increasing the cover value as well as the yield for depositors.

@Llamaxyz

• Shortfall coverage tiers - Auction off varying portions of deposits in the event of a Shortfall. Examples: 30%, 45% and 60%. Aave can elect to offer higher yield for higher Shortfall coverage. The type of assets included, amount (ceiling) and composition can all be controlled by Aave governance.

The SM currently has 2 categories (Single Asset & Variable LP). There are several considerations for the slashing categories: The one described above is assuming the same assets in the 45% & 60% slashing categories.

Another one, which is considered in the strategy, would be to have 3 categories with different assets: Single assets, Volatile LPs and Stable LPs, with different slashing and yield ranges for each category.

The assets considered in the strategy are the following:

Single assets: 30% Slashing (Rewards in AAVE & potentially GHO)

• AAVE > StkAave
• wETH (and/or wstETH) > StkwETH (and/or StkwstETH)

Volatile LPs: 45% Slashing (Rewards in BAL + AURA)
The weights are to be discussed in the Aave liquidity pools proposal:

• BPT-AAVE-WETH (or LST) > Stk-aurasmB-AAVE-WETH-gauge
• BPT-AAVE-GHO > Stk-aurasmB-AAVE-GHO-gauge
• BPT-GHO-WETH (or LST) > Stk-aurasmB-GHO-WETH-gauge

Stable LPs: 60% Slashing (Rewards in BAL + AURA)
There are several stables that could be considered for pairing GHO, the community should discuss the assets to consider for this pool. (Note: There will be several GHO pools created.)

• BPT-GHO-Stable: > Stk-aurasmB-GHO-Stable-gauge

In both volatile and stable categories, the SM would receive BPT, then mint “smBPT” (which is the asset eligible for the gauge), then deposit smBPT on Aura which stake on Balancer & boost, the SM receive aurasmBPT-gauge & mint Stk-aurasmBPT-gauge to depositors.

@Llamaxyz

Develop an equivalent contract which enables deposits into the SM to earn rewards from Curve, Convex, Balancer, Aura and others. This is to showcase something that could be done but would introduce a lot of risk surface area. The community does need to consider the holistic Aave exposure to one protocol from a risk perspective.

Considering that CRV & CVX holdings are relatively small, that most of GHO liquidity will most likely be on Balancer and to reduce the scope and associated risks, the strategy proposal is focusing on the Balancer ecosystem.

However, as the veBoost power would be too low to max boost positions on Balancer at first, the idea would be to start by implementing Aura only on the SM contracts.

As the Aave DAO veBAL boost power will grow over time, Balancer can be implemented later to optimize the veBoost by migrating part of the funds deployed on Aura to Balancer.

Curve, Convex and any other protocol where Aave would accumulate strategic voting power can also be considered later.

@bgdlabs

From the technical side, important to clarify that the current system is not really adapted to define a specific % of “APR”, as it is based on the concept of “emission per second”, the equivalent to what @Llamaxyz points out of 550 AAVE per day currently.

So a model like this, would be more about defining a total of emissions per second (one/multiple reward tokens, e.g. AAVE, GHO, etc) and then static percentages for different tranches: for example, the 60% slash tranche would get 60% of rewards, 45% the 30% of rewards and 30% would get 10% of rewards.

Thanks for the detailed feedback !

To clarify, there is a typo on the risk tranche 2 & 3, tokens emissions rewards considered are BAL & AURA not AAVE & GHO. Also, the range APR shown on the table above are taken from the proposal, based on TVL & yield estimations as well as current market metrics. (The strategy calculations are based on the current SM reward budget to remain below 1100 AAVE/day).

According to estimated TVLs, targeting these APR ranges would result in an increasing reward budget if distributed in AAVE liquidity mining, which is not the idea.

While it’s better to keep this liquidity mining method for single assets because there are no gauges on it, it’s possible to have some for Balancer liquidity pools, it’s even more interesting if these are core pools.

If smBPT are eligible for gauges rewards, part of the current AAVE reward budget should be used for vote incentives, driving more BAL emission to Aave related pools, bringing more Aura rewards as AURA emission is related to BAL captured by the protocol. Later on, migration from AAVE to GHO rewards could be considered.
This would be the case in both volatile & stable LP categories, which would create too much complexity to use the same distribution model as single assets liquidity mining.

I guess AURA + BAL rewards claimable weekly/bi-weekly and distributed in proportion to the deposits in the SM could be more gas efficient and easier to implement for LP categories ?

@bgdlabs

Depending on the underlying facility (Curve, Convex, Aura, etc), potentially is possible to not do any extra development for re-usage of capital on the SM, it mainly depends if those platforms allow tokenization & transferability (that SM can just use them without any problem as it is), or not.

Generally, we encourage to focus on platforms with tokenization, as it makes things simpler development/security-wise.

Despite strategic voting power positions like veBAL holdings which might be locked on Balancer from the collector contract, all liquidity positions on the quoted protocols allows tokenization & transferability.

It can make sense to add new protocols progressively, starting by the Balancer & Aura (Most interesting for the strategy considering Aave’s veBAL share.)

@bgdlabs

That being said, we recommend being cautious with ideas of using GHO or LPs including it as asset to deposit into the SM. If properly defined could potentially work, but initially it creates some type of circular dependency that should be studied in depth for the following reasons:

• GHO is minted exclusively from Aave v3 Ethereum to start with, and on that model, used to backstop precisely the debt of that pool, including GHO debt.

• The Aave v3 Ethereum GHO facilitator has at its core a discount mechanism based on the SM holdings. Most probably this is not an issue, but definitely, the impact should be considered.

• GHO is exposed to all assets listed and to-be-listed in non-isolation in the Aave v3 Ethereum pool. It means the risk profile changes with every new asset listed (not straightforward to state if its risk profile gets better or worse, depends on multiple factors), so again, having it backing the same pool and acting as a reward is somehow interdependent == should be really studied.

While all pools proposed with stables are including GHO, I totally agree with this point and I remind that these are only examples, the assets in the pools are to be discussed by the community.

I initially considered core pools everywhere but renounced them as the obvious choice to pair would be bb-a-USD, which creates an even bigger circular dependancy, so it’s very risky to have aTokens in the SM.

Of course there are other possibilities for core pools such as generalized boosted pools recently released by Balancer which could be discussed later if the community is interested in focusing on this point.

One potential solution to limitate GHO inclusion risks could be to cap the deposits on each asset, with a limited amount compared to the total GHO circulating. This would also help define and maintain the range APR expected depending on TVL & voting power on the smBPT gauges. Other stablecoins than GHO could also be considered.

@jbeezy

I would be happy to discuss additional considerations such as wstETH/bb-a-WETH support. This could have second order effects by increasing TVL on Aave markets both through direct deposits from Bal as well as the folded leverage loops that are popular with the kids.

Thanks for the feedback !

While adding LST to the SM can bring additional risks that need to be properly considered, wstETH could be added either on single assets, volatile LPs or in both categories.

As mentioned above, it’s very risky to add aTokens in the SM as it’s here to cover the funds deposited on the Aave protocol, so if something happens on Aave and aTokens are in the SM, the same happens to the cover. However, the wstETH/bb-a-ETH pool seems a very good addition as collateral for the StakedATokens proposal.

@John_TV_Locke

Doing some analysis on our end, our primary concern is sustainability of the strategy. So far in 2023, emissions to incentivize staking in the Safety Module are 4.8x revenue earned from the covered instances (not including flash loan revs). SM AAVE incentives are funded by the Ecosystem Reserve. So that gives this strategy roughly a 4.5-year runway.

Hey John, thanks a lot for this detailed feedback !

I agree that the liquidity mining in Aave from the ecosystem reserve is not sustainable, and Llama’s work on some previous and upcoming proposals aims to change that in several ways:

Strategic voting power accumulation:

• Proposals to buy BAL, convert in B-80BAL-20WETH and to lock BPT & CRV holdings bought and from the Collector contract to receive veBAL & veCRV, allowing to redirect emission on the Aave related pools
• Collector contracts treasury strategies: In work proposals to deploy part of the funds held in the collectors to accumulate more strategic voting power.
• Protocol Owned Liquidity & Insurance : If the SM update is voted, considerations to deposit part of the collector contract in the Safety module to partially self insure the protocol and accumulate more BAL & AURA, increasing the voting power of the DAO over time, which reduces the reward budget needed. (This would also re-accumulate AAVE as the DAO would receive some as vote incentives).

Safety Module updates (upcoming proposals):

• Optimization of the rewards distribution by creating vote incentives to attract more strategic voting power on Aave pools
• Safety module Insurance cost important reduction
• Boost of the yield by Aura’s veBAL holdings + AURA & BAL rewards for depositors
• Core pools considerations (receives vote incentives directly from Balancer, in exchange for part of the yield generated by IBTs in the pool)
• Slashing parameters increase leading to a higher cover value
• Avoid incentives dilution by creating gauges on smBPT assets
• Earn AAVE back by voting with the DAO on Aave pools & receiving vote incentives.
• Implement a bad debt budget to reduce the risks & associated yield on the SM

Further Considerations:

Use part of the revenues generated by GHO for several uses cases such as:

• Progressively replace the current SM budget, reducing AAVE selling pressure & spending (~10 to 20% of GHO earnings)
• Consider using a portion TBD to build POL positions over time, generating more strategic assets, leading to a better liquidity as well as a reduction of incentives needed.

As for the treasury diversification, I’d say it’s already happening but it takes time. AAVE holdings represent 75.6% of a 143M treasury, while 19.3% are stables. It’s true that the collector contracts earn revenues from many different assets, which is why we proposed consolidation proposals, but it was for USDC. The DAO could consider doing the next consolidation for AAVE indeed.

I believe this covers the points 1-Treasury Currently Alignment & 2-Risk Budget.

About point 3-Effectiveness, I fully agree with you on the lack of efficiency and I believe you’ll like the upcoming proposal as it’s about fixing all these points.

Agree about point 4-Tokenomics, but I guess things will change with the GHO release, as the tokenomics are improved by the reduced interest rate if holding StkAAVE. Migrating the rewards to GHO over time and consider a long term accumulation by the protocol could also help.

Again, I agree on point 5, the goal is definitely to benefit from considerable partnerships with influential protocols in the ecosystem and create synergies.

Looking forward to discuss and receive more valuable feedback on these topics !