Gauntlet Update
Following the community discussion thus far, Gauntlet provides the below options to the community. While we generally aim to provide a shorter list of options, in this case, given the diverse opinions of the community, we provide a greater set of options to encapsulate the comments above. We are appreciative of all the community involvement here.
In this case, it can be difficult for the community to make a decision without concrete figures, context, and expected impact (e.g., liquidations to users) of the different options. We hope the data and explanations below help clarify the tradeoffs for the community to make a thorough, transparent decision.
We aim to move expeditiously while allowing enough time for community discussion. Therefore, we target the below timeline:
- We will initiate Snapshot vote on Friday, 3/24/2023, with ample time for voting.
- Following the community’s preference via Snapshot, publish AIP on 4/10/2023 to give users enough time to adjust positions as needed.
As a reminder, these parameter recommendations are for V3 Avalanche, Optimism, Polygon, and Arbitrum.
Recommendation Options
- Option 1: (Include all current assets) - 87% LT, 84% LTV, 2% LB.
- We recommend AGEUR to be removed from Polygon E-mode due to the AGEUR depeg and inability to repeg. However, for simplicity, we recommend an initial step of changing the LT and LTV parameters and then following up later to remove AGEUR.
- Option 2: (Gauntlet original) - DAI, USDC, FRAX (if already listed) at 97.5% LT, 97% LTV, 1% LB
- Option 3: (Gauntlet conservative) - DAI, USDC, FRAX (if already listed) at 95% LT, 93% LTV, 1% LB
- Option 4: Completely remove stablecoin E-mode from Aave V3
As @bgdlabs mentioned above, certain actions, such as removing assets from E-mode, can result in liquidations. For transparency, we have compiled approximated forced liquidation data here to summarize the impact of these options. To briefly summarize these,
| Option | Total Collateral Liquidated | User loss to Liquidation Bonus |
|---|---|---|
| 1 | 12,700,000 | 535,000 |
| 2 | 3,300,000 | 160,000 |
| 3 | 8,150,000 | 210,000 |
| 4 | 15,400,000 | 650,000 |
For illustration, we summarize the results for Optimism on Option 4 below. The other chains and options followed the same methodology.
Optimism on Option 4
- ~130 liquidatable accounts
- ~$2.0M in collateral liquidatable [$2.1M in collateral supplied]
- ~$98K collateral lost to liquidation bonus
Here is the breakdown of the top ten accounts contributing to losses from liquidation bonus:
The top user 0x8c0fcf914e90ff5d7f2d02c1576bf4245fad2b7f is a recursive USDC borrower and contributes $32.7K in bonus paid to the liquidator if the position is liquidated.
What is E-mode meant for?
Stablecoin E-mode presents a tradeoff between leveraged capital efficiency and enhanced fee generation versus overexposure to tail depeg events (as we saw with the SVB incident). The magnitude of the next black swan depeg is impossible to predict. Likewise, the insolvencies that occur at that future time will be dependent on the future loanbook and future liquidity are also impossible to predict. Indexing on the handful of past depeg events does not really capture future potential events and how dangerous they could be. The day-to-day variance and noise as stablecoins move around $1 (or other benchmarks) is natural and does not contribute to insolvency risks.
Ultimately, it is up to the community to determine how emode should be used.
- Option 1: If the community wishes to enable various trading strategies, as noted by @sakulstra and @ghostlyenergy, it should pick option 1, as option 1 includes more assets.
- Option 2: If the community wishes to facilitate methods to borrow historically correlated assets, it should pick option 2, as option 2 assets are more heavily correlated.
- Option 3: Likewise, if the community wishes to provide a higher margin of safety in addition to option 2, it should pick option 3 instead. For example, if the community wishes to discount the future correlation of DAI with USDC per the predictions above noted by @WintermuteGovernance and @fig, the community may wish to choose this option.
- Option 4: Finally, if the community believes the tail risks of stablecoin emode outweigh having the above options, it should pick option 4.
Next Steps:
- Initiate Snapshot vote on 3/24/2023.
- Following the community’s preference via Snapshot, publish AIP on 4/10/2023.
Quick Links:
FAQs:
DAI and USDC returns are highly correlated. If the community wishes to heavily index on the past black swan event, then the community may wish to set an even lower LT and LTV to accommodate buffer between the next black swan depeg event. The next depeg event may be even larger in magnitude.
The reason why it is difficult to simply toggle emode on/off is the forced liquidations that will occur. See the above spreadsheet for detailed liquidations breakdown at each option.
The spread between LTV and LT is less effective at mitigating insolvencies than LT. As you’ve noted, it is easily bypassed and is primarily meant to help less informed users mitigate liquidation risks and is a UI consideration. The spread is a function of pairwise metrics including correlation.
Thank you for bringing this point up. In the end, Gauntlet can only perform analysis on past data, and it is impossible to predict exactly how the composition of collateral that will be allowed to back DAI will evolve after the SVB incident, which will necessarily affect the relationship between pairwise returns in the future.