Chaos Labs Risk Parameter Updates - Aave V3 Optimism - 2023.02.28
Vote Result: YES
Rationale
There is no effect on the projected VaR and EVaR with increases in the LT and LTV of these assets, and there is a projected borrow increase of $470k from the parameter changes, which brings improved capital efficiency on and revenues for Aave. Moreover, the risk of increasing these parameters is not high, since there is adequate on-chain liquidity to support significant liquidations with minimal slippage on these assets. The logic around reducing the liquidation penalty for WBTC also makes sense given the blue-chip nature of BTC/WBTC and the arbitrage buying pressure to realign slippage. Lastly, the limiting of the proposed changes by ±3% for all parameters mitigates risk and allows for further analysis.
One area of risk is that 50% of the on-chain supply of WBTC on Optimism is currently held on Aave, which is being mitigated by the amendment to the supply cap of WBTC on Optimism. Another risk is that there is a large position that supplies approximately 75% of USDC on Optimism and does not borrow against its ~$40M USDC position; if this position starts borrowing, there is a possibility that it increases VaR on the platform. Should this wallet start actively borrowing against its supply, the additional risk will depend on the borrowed assets. On Optimism, WETH is the most borrowed asset for USDC suppliers, and in such a case, the deep liquidity of both USDC and WETH on Optimism should be able to absorb large liquidations, should they occur. As such, the impact of potential borrow action can be assessed once there is a change in this position on Optimism.
Therefore, we will vote YES in favour of this proposal.
Risk Parameter Updates for MKR - Aave V2 Ethereum
Vote Result: YES
Rationale
This is the on-chain vote for this Snapshot vote that we voted in favour of according to our rationale posted here. Therefore, we will vote YES in favour of this proposal as well.
[ARFC] Add MKR to Ethereum v3
Vote Result: YES
Rationale
MKR is from a reputed community with close links to Aave, with Maker contributing significant TVL to v2 via DAI and MKR. Moreover, the borrow and supply caps, along with other risk parameters, are conservative and presented together by Chaos Labs and Gauntlet. A point to note is that the MKR community has been clear that they do not want their asset to be borrowed even if that means no revenue for them, and this proposal recommends a 1,500 MKR borrow cap. However, the amount is negligible, and should not be a deal breaker for onboarding the asset. They have also voiced support for a borrow cap in the past. Therefore, we will vote YES in favour of this proposal.
1 Like
stMATIC SupplyCap Increase Polygon v3
Vote Result: YES
Rationale
This proposal seeks to further incentivise Aave V3 deployment on Polygon by doubling the current stMATIC reserve supply cap. We support the initiative since it will allow Lido DAO’s distribution of LDO rewards while keeping a conservative supply increase, which will be lower than that suggested by Gauntlet. Therefore, we will vote YES in favour of this proposal.
[TEMP CHECK] - Whitelist Hashflow Wormhole For V3 Portals
Vote Result: YES
Rationale
We are in support of this proposal to facilitate collateral transfers when backing aTokens using Wormhole and Hashflow, with a couple of points of consideration for the Aave community. Firstly, this proposal extends Aave’s head-start on its multi-chain deployment and usage and provides a very relevant use case to pilot v3’s Portals function, which is necessary. Secondly, Wormhole currently does not charge any fees for token bridging. The fee model makes sense and is likely not to change in the short to medium term. Thirdly, users also pay no trading fees for this cross-chain swap and are only responsible for the gas fees. Fourthly, the minting caps initially are small and mitigate risk, and are for three of the most-used and liquid assets in DeFi. And finally, Wormhole has put in steps to mitigate risks after the hack, including the Governor function, Wormhole Chain on Cosmos, and an emergency shutdown module (which, however, poses some centralisation risk since it is controlled by the Guardians).
However, we have two points to consider. First, Wormhole is controlled by 19 guardians and its consensus mechanism is proof of authority, so it is centralised to an extent and more of a risk for security. We recognise that they are exploring zk-bridging and this is not necessarily a reason to reject the proposal at the moment. However, the centralisation aspect does need to improve and become more resilient over time especially given the hack last year. Second, as @MarcZeller has suggested, in the event of a shortfall, it would be good if an equivalent amount could be deposited in Aave Pools in the form of aTokens that could be potentially mobilised. Wormhole/Hashflow could similarly deposit a percentage of fees generated to an Insurance Fund which would protect Aave in case of a shortfall. This is as Wormhole/Hashflow are sharing in the upside of transaction fees on Aave, but in the (unfortunate) circumstance that a hack occurs, Aave would have to bear all of the cost and therefore some sort of protection against a shortfall would be better to align incentives.
Overall, we are in favour of this proposal and will vote YES, while encouraging the actors involved in the current proposal to consider including an Insurance Fund (or something in the same vein) to better align incentives between Aave and Wormhole/Hashflow.
Increase Supply Cap for cbETH Aave Ethereum V3
Vote Result: NO
Rationale
Both Gauntlet and Chaos Labs took considerations of the fact that cbETH is going to be included in the eMode, but they have different targets for setting the supply cap. Chaos Labs initially would like to raise the supply cap of cbETH by 2X to 40k, but after considering the impact of enabling eMode for cbETH, they suggested raising the cap to 30k. Gauntlet, on the other hand, suggests that the community should wait to see what percentage of cbETH will be supplied in eMode vs. non-eMode when eMode is enabled before making adjustment to the supply cap. Given the fact that the risk profiles of cbETH are very different under non-eMode and eMode, we suggest waiting until there is more information and data regarding cbETH after eMode is executed and then adjusting the supply cap accordingly.
[ARFC] Add UNI to Ethereum v3
Vote Result: YES
Rationale
UNI is a DeFi bluechip and has already been deployed on both Aave v1 and Aave v2. The proposed risk parameters are similar to those on older versions of Aave and are scrutinised by Gauntlet and Chaos Labs, so there are no specific risks associated.
[ARFC] Grant OP Emission_Admin for Optimism v3 Liquidity Pool to Lido DAO
Vote Result: YES
Rationale
As with similar previous proposals, we believe this one provides a good incentive for adopting wstETH in Aave V3 Optimism without adding meaningful risks for the protocol. Thus, we will support it and will vote YES.
GHST Polygon V3 Soft Freeze
Vote Result: YES
Rationale
The risk profile of GHST is changing significantly. Previously, GHST was minted and burned on an ETH L1 bonding curve contract, which lowered its volatility. However, now that the bonding curve is being deprecated, this severely impacts the value of GHST since it is now solely determined by secondary market liquidity (i.e., speculation). Soft freezing GHST and observing market data to see how it will react in the coming months is prudent and conservative. Therefore, we will vote YES in favour of this proposal.
BUSD Offboarding Plan
Vote Result: YES
Rationale
This is the on-chain vote for this Snapshot that we voted in favour of according to our rationale posted here.
[ARFC] Onboard AgEUR to Aave Arbitrum V3
Vote Result: YES
Rationale
agEUR is one of the mainstream EUR-pegged decentralized stablecoins. Adding agEUR to Aave will expand Aave’s user base due to the large demand for depositing the assets. It will also open the gateway for Aave to participate in the Euro market and diversify the asset base that Aave supports. One point to note is that Chaos Labs and Gauntlet have not provided their analysis. Therefore, we will vote YES in favour of this proposal, but will await their analysis before committing to vote YES in any on-chain votes.
[ARFC] Onboard AgEUR to Aave Optimism V3
Vote Result: YES
Rationale
agEUR is one of the mainstream EUR-pegged decentralized stablecoins. Adding agEUR to Aave will expand Aave’s user base due to the large demand for depositing the assets. It will also open the gateway for Aave to participate in the Euro market and diversify the asset base that Aave supports. One point to note is that Chaos Labs and Gauntlet have not provided their analysis. Therefore, we will vote YES in favour of this proposal, but will await their analysis before committing to vote YES in any on-chain votes.
[ARFC] Add LUSD to Optimism V3 Market
Vote Result: YES
Rationale
We support this proposal to onboard LUSD to Optimism V3. LUSD is a decentralised stablecoin issued by Liquity, a lending protocol enabling borrowing against Ethereum with 0% interest (with proceeds paid out as LUSD). Given the high-quality collateral base and technical construction, we see limited centralisation / operational risk in this stablecoin. Moreover, Optimism is a growing L2 ecosystem on which many other blue-chip DeFi protocols have already deployed. Given the proposed risk parameters, we support onboarding this collateral to enable a new revenue stream for Aave.
[ARC] Extend Aave DAO with EIP-4824
Vote Result: YES
Rationale
Given the updated implementation which removes the temporary contract manager (held via multi-sig), we believe this is a relatively low risk upgrade that improves the compatibility and external discoverability of Aave DAO and its smart contracts.
[ARFC] Add SNX to Ethereum v3
Vote Result: YES
Rationale
We support AAVE to transit smoothly from V2 to V3 by onboarding more asset classes. For long tail assets, it makes sense to start with isolation mode and a relatively conservative parameter setting. Given current market conditions, it benefits the protocol by diversifying risk exposure. Given that Chaos Labs and Gauntlet have both agreed on the parameters for SNX on Ethereum v3, we will vote YES in favour of this proposal.
1 Like
[ARC] Platypus Finance Rescue Mission
Vote Result: YES
Rationale
Approving the proposal means returning the funds that were stolen from Platypus Finance. The move has no negative effect on AAVE and is in line with building a robust DeFi ecosystem. Although the returning process seems straightforward, the resources put into it should be further evaluated and compensated. We will therefore vote YES for this proposal.
1 Like
[ARFC] Deploy BAL & aBAL from the Collector Contract
Vote Result: Option 1 - Locking veBAL
Rationale
We recommend and have voted for Option 1 for the following reasons:
- There is an immediate impact;
- GHO liquidity can be bootstrapped;
- Aave has a strategic relationship with BAL and this will align us more;
- It is a simpler, less complex implementation than Option 2;
- Even though auraBAL is a transferable asset, holding it exposes Aave to further risks and liquidity may be constrained since 90-day volume does not seem too high;
- veBAL has a lower risk profile than auraBAL.
- The lock-up period is a year, which is inflexible, but it does allow us to revisit our strategy in a year’s time and move to auraBAL if the risk is lower, market conditions are better, and it would be more advantageous for Aave to target higher yield than drive BAL gauges.
[ARFC] Extend Safety Module Coverage to Polygon v3
Vote Result: YES
Rationale
We are in favour of extending the Safety Module to Polygon v3 since, firstly, it supports the migration of capital to v3, and giving Polygon v3 users the same level of coverage as v2 users makes sense. Llama is also creating similar proposals for the remaining v3 markets, making this proposal not limited only to Polygon and bringing the Safety Module to all markets. Therefore, we will vote YES in favour of this proposal.
MaticX Supply Cap Increase Polygon v3
Vote Result: YES
Rationale
There is a lot of demand for MaticX on Polygon v3, given the comments from Stader Labs who are distributing SD rewards to users who deposit MaticX, and the fact that the supply cap of MaticX, when increased from 6 to 8.6M units, was filled in 24 hours. While Chaos Labs’ analysis indicates that a 2x increase in supply cap is appropriate, according to Gauntlet, MaticX circulating supply on Polygon is not enough to raise the cap to 17.2M units, because this would mean that more than 50% of the circulating supply is deposited to Aave. However, we see two counterpoints to this: more MaticX can be migrated from Ethereum, and there is low risk on MATIC-MaticX conversion since any MaticX can be redeemed at fair value on the L1 after a 3-day delay; it is not less liquid than MATIC. Moreover, increasing the supply cap grows revenue for Aave through the recursive MATIC/MaticX strategy.
Therefore, we will vote YES to increase the supply cap of MaticX on Polygon v3 by 2x from 8.6M to 17.2M units.
Disable agEUR borrows on Aave v3 Polygon
Vote Result: YES
Rationale
Given the questions around collateralization of Angle following the exploit on Euler, making sure that there are no more borrows and no more risk to Aave from agEUR is paramount. Further, Chaos Labs have authored this proposal and Gauntlet is in support. Therefore, we will vote YES in favour of this proposal.