We appreciate all the community feedback thus far. As an update, we have published an AIP to set LTV to zero - voting begins in 1 day. As always, we are available 24/7 to answer any questions.
We’re receiving various questions regarding the proposals within this thread. For clarity and transparency, we’ll post a summary here.
Regrettably, setting LTV to 0 isn’t a silver bullet for preventing exposure. It can be bypassed in V2 through flash loans, as elaborated here.
A sophisticated user can still deposit an asset and increase borrows, meaning our ability to diminish increased CRV exposure is not absolute.
Again, we’re not against this adjustment; however, it is crucial to comprehend the level of protection it can and cannot provide.
We’re leading an initiative to progressively lessen exposure to V2 assets, particularly those with risk profiles that have intensified significantly over the past year due to thinning liquidity and market cap. Our latest proposal to reduce CRV LTs received approval; however, we refrained from execution as the implications and risk of such a reduction expanded considerably. In the intervening period between the governance vote approval and the AIP execution, the Vyper Zero Day vulnerability was identified and exploited in various Curve pools. Given the current market volatility, we intend to await stability, re-evaluate the market circumstances, and subsequently propose additional reduction plans.
We recommend disabling CRV borrows on the Ethereum and Polygon V3 deployment to minimize the potential of shorting CRV or borrowing CRV to dump and further impact price. It seems there is consensus to do this, and we are preparing a proposal.
This constitutes the most significant aspect of our ongoing discussion. Hence, we propose moving forward with a vote involving two options:
- No Market Freeze
- Market Freeze
As always, we’re available on all channels. Don’t hesitate to reach out if you have any questions or need clarification.
The idea to progressively phase out the V2 CRV market has my full support. Even if the unanticipated Vyper Zero-Day exploit caused a snag, I still think that lowering Aave’s susceptibility to CRV was the appropriate choice. It makes sense to disable CRV borrows on Polygon V3 and Ethereum. Let’s reduce the likelihood of shorting CRV or borrowing to dump and maintain that price.
In times of crisis, it’s natural to feel a strong urge to react and “do something”.
As delegates and service providers, we often feel obligated to form an opinion and propose clear actions, regardless of what they might be. We face pressure from the community to do so and are subject to criticism no matter what course we take.
However, sometimes the best course of action is counter-intuitive and may even seem unacceptable to some: doing nothing.
Setting the LTV to 0 on V2 doesn’t prevent anything. It will affect the user interface experience, but the user in question is one of the most skilled developers on the planet. They have the full ability to figure out that they can deposit and withdraw, and this will absolutely not prevent more borrowing.
Using the LT as a lever in a violent manner is not a viable strategy, as it will create the harm & consequences we are all trying to avoid.
Disabling CRV borrows is not expected to have a significant effect. it’s already the case on V2 and has well-designed caps on V3. CRV is a strategic asset for the Aave treasury in the context of GHO, and eliminating CRV revenue does not seem like an optimal strategy.
A market freeze will prevent this user from adding collateral and reducing short-term liquidation risks. It will do more harm than good.
The ACI sticks to its vision for this particular position. We are firmly committed to the DeFi ethos and supports only a gradual reduction of the CRV LTV & LT on V2 while continuing off-chain coordination to reduce this debt to 0 on V2 over time by encouraging repayment & migration.
The ACI is considering casting a NAY vote on this proposal designed to have little to no added value.
This user is taking advantage of AAVE V2’s parameters and prioritizing his debts on FraxLend. If there are some ongoing off chain conversations to pay his debts; they should be communicated to the community ASAP. This type of uncertainty is not sustainable and is damaging AAVE (CT FUD, AAVE price, outflow of AAVE stakers, etc.)
Given the current circumstances, we believe that the LTV for CRV should be set to 0. If further updates are shared, other parameter changes or a complete freeze should be considered.
We are in favour of setting LTV → 0 and freezing CRV.
While there has been some repayment to Aave, Aave came last out of Fraxlend and Abra
most likely due to Aave offering more favourable conditions.
We also doubt that this will be the last time the large CRV position gets tested and the protocol is on the verge of adverse liquidations.
We are not privy to any of the off-chain communication and understand that the protocol was used as designed. But maybe the current position was an edge case that was rather hard to foresee (or at least estimated to be extremely unlikely) and everything was okay until it wasn’t.
On freezing CRV - this is particularly important and places an upper limit on the protocol’s exposure to CRV. It reduces Mich’s optionality and forces him to pay back his debt instead of adding to his collateral position and further increasing Aave’s exposure to CRV. It’s evident from the recent OTC sales that managing this CRV position is becoming increasingly difficult. We fully support the freezing of CRV.
We are also in favour of reducing/ disabling the borrow caps of CRV on Ethereum and Polygon V3, reducing is more favourable given you can still earn yield on CRV.
We are in favour of setting LTV to 0 even though we think that this may not be the most effective lever given that it can be bypassed on v2.
We are in not in favour of freezing the market at the moment since it will not allow the user to top up his position with collateral in deteriorating liquidity conditions, the user has a good track record of loan repayments and maintaining a healthy position, and will get liquidated if there is a steep price drop which is very possible. However, we do take @WintermuteGovernance’s position into account, and think that over the longer term if LT/LTV reductions do not prove to be good enough incentives for the user to pay his position back, a freeze of the market may be necessary to make sure the position is paid back.
We think LT reductions should be paused for the moment until there is more stability and market conditions are reevaluated. We also agree with Chaos Labs in disabling CRV borrows on Ethereum and Polygon v3.
As others have stated, setting LTV to 0 does nothing and so should be avoided. There is no worse action in a time of perceived crisis than a meaningless gesture which adds confusion to the market about what can or can’t be done.
Its important market participants feel they can rely on AAVE to be a credibly neutral market. Making sudden large moves targeted against specific addresses is unbecoming of a protocol, and influences the decisions of future market participants against reliance on such a market. Any change should be done gradually
Even Abra is taking measures to force the user to pay his debts Snapshot I can’t believe that @MarcZeller believes that freezing the market could do more harm than good, having more CRV exposure is not good for AAVE and the proper risk management for this market should have been done a year ago, now it’s time to control the damage and forget about “the system is working as intended” because that spirit could sink the ship.
At first, when @Gauntlet recommended last month the idea of LTV to 0, we were not in favour as we felt this was an attack to a very specific wallet and this is not how DeFi and it’s ethics work.
Now the problem has escalated to a way more critical level and we believe it’s time to send a strong message to that wallet as they’ve been carrying this strategy for a long time.
At the time of writing this, the net APY of the wallet 0x7a16ff8270133f063aab6c9977183d9e72835428 is at -21.40%. This is clearly driving stablecoin depositors out of Aave due to the risks involved.
We acknowledge that it’s possible to bypass V2 and that the specific user is probably capable of applying that method but we’re supportive of putting LTV to 0.
We are also supportive of reducing LT progressively when the market allows it as already voted on this AIP.
We also support the disabling of borrowing for V3 as suggested by @ChaosLabs.
Now regarding the market freeze. We do agree with @WintermuteGovernance’s opinion on limiting protocol exposure.
@MarcZeller has rightfully expressed that a market freeze will potentially block the user of adding collateral and reducing liquidations. He also suggests that a gradual reduction of LTV & LT is the way. As already mentioned, initially we were in favour of this strategy.
We believe this user has had this position for this long as it potentially is one of his major avenues for liquidity. Unfortunately, we’re not in faith that off-chain coordination and encouraging the user to reduce the debt will be successful. If the user has a plan on repayment (especially considering the skewing of APYs on v2), we would love to hear it as a community and then potentially reconsider.
And because of that, we will be in favour of a market freeze.
Inverse Finance is also moving as we speak:
- Change collateral factors and liquidation incentives.
- Pause new borrows
- Reduce max DBR streaming rate to incentivize repayments
- Lower global debt ceiling to reduce impact on DOLA’s supply and peg
I hate to say this, but it feels that the slowest protocol will take the biggest hit (accrue bad debt). It feels that now it’s a race between protocols
- LTV → 0. “Soft” measure, but the protocol should exercise available levers that prevent increased borrowings against CRV, if not affecting other assets.
- Freezing CRV on Aave v2. Refilling CRV should not be an option anymore; borrowers against CRV should simply reduce their debt.
- Disabling borrowing of CRV on Aave v3. With market instability on CRV, it definitely doesn’t bring value to expand its borrowing market depth. Additionally, to disable borrowing, I support increasing substantially the interest rate strategy of CRV to incentivize its borrowers to close positions.
- Reduce borrow cap of CRV on Aave v3. Complementary “hygiene” with the disabling of borrowing.
This is it. If we ( the AAVE dao) will be the last then we will also be the ones with the biggest loss.
It can’t be that one single person is threatening lending protocol’s the same way like 3AC did with Voyager and so on.
It’s about us and the token holder and I am for myself see the only way out is to repay debt. So I am in favor of what @eboado wrote. And I hope others are too otherwise I will also remove voting power and vote by myself again.
We are preparing and testing an AIP to freeze CRV on Aave v2 given the comments above.
An additional 5m USDT has been repaid.
An additional 10m $CRV has been redeemed.
Borrow Balance: $49.2M.
The key parameter changes proposed by Gauntlet and Chaos where the community might have a different view are 1) CRV market freeze and/or 2) LT decrease. LTV decrease to 0 seems as only good optics at best, while disabling borrowing at v3 and tweaking liquidation bonuses will have partial derisking effect.
CRV market freeze
- Forces borrower to make repayment instead of making top-ups of collateral which would make problem worse in the future
- Disables any future borrowings from other CRV whales who wouldn’t mind dumping large CRV amounts at 45% slippage to the prevailing market price (assumption LT is not changed significantly)
- If CRV price continues to decrease borrower might get liquidated faster since there is no ability to make top-ups (he still holds significant amount of CRV and vests 1m CRV per week)
- Forces borrower to react faster compared to other lending markets by either making top-ups or repayments (see behaviour at fraxlend)
- More buffer for protecting against bad debt once liquidated
- Lowers attack vector of close to unlimited liquidity for CRV sellers at 1-LT slippage
- Higher likelihood of liquidation
The key question is whether the community believes the borrower is able to unwind his position via discount OTC trades once forced to do so (as with fraxlend case). If yes, then the most reasonable thing to do is to have both changes implemented as they force the borrower to react faster and via repayment. If no, none of them should be implemented as both changes increase the likelihood of the borrower being liquidated.
There are also two other important aspects of the decision that shouldn’t be underestimated.
First, negative sentiment on crypto twitter could make the problem worse for Aave if no change is implemented and we can already see hundreds of millions of capital is leaving v2. Could be this is only temporary, but in the end general PR will play a big role one way or another and it shouldn’t be underestimated.
Second, if Fraxlend, Abracadabra and Inverse start making parameter changes so that the borrower is forced to unwind before Aave, Aave will be the last one standing with most of secondary market liquidity being already absorbed. Abracadabra is already making moves on IR model changes for CRV cauldron.
Reality is that the aggregate loan of 90m collateralized by 480m CRV should withstand repayment without any bad debt being realized at a minimum price of 60% below the current market price (about $0.2) which implies $620m fully diluted max supply mcap / $100m current mcap. If the borrower starts performing serious selling of his assets via OTC at decent discount, he could find buyers at a price that still saves all protocols against any bad debt. Or maybe at least reduces the exposure by a factor of 2-3x and at the same time increases collateralization.
Below are a few other potential levers to reduce risk of CRV on Aave v2:
- Increase CRV liquidation penalty
- Adjust CRV reserve factors
- Adjust interest rate models
Increase CRV Liquidation Penalty
Currently Aave has an 8% liquidation penalty (bonus received by liquidator in exchange for liquidating collateral), compared with 10% penalty used at Abracadabra, Inverse Finance, and Fraxlend. If CRV collateral across multiple protocols is in liquidation at the same time, this raises the possibility that Aave sees significantly lower liquidator participation as their profit margins would be greater on other protocols. In a worst case scenario, Aave may see little to now liquidation activity even as price falls until CRV on competing protocols has been completely exhausted.
When comparing this potential liquidator preference risk vs the marginal increase in insolvency price of the Aave v2 CRV position and greater potential pressure on market liquidity, it seems the balance of risk favors increasing liquidation penalty at least up to parity with other protocols.
Aave could even consider increasing the liquidation penalty much higher, in theory up to 40-45% before bad debt is realized, since it has advantage over other protocols - because LT of Aave is 55% while other protocols have it set mostly around 75%, Aave can afford to sell collateral at the highest discount available. This ensures broader participation in liquidations, not only from arbitrageurs but also potential long term buyers. However this could also be risky as it might push oracle too low very fast.
Adjust CRV Reserve Factors
This change is unlikely to have a significant impact on risk level, but will somewhat increase Aave’s compensation for the risk already taken on by the protocol. Currently CRV features a 25% reserve factor on v2 Ethereum, and 35% on v3 Ethereum and Polygon. Increasing this to a very high level (for example 99%) would result in roughly $1.5 million per year increase in protocol revenue from the current state. These CRV reserves could then be put to use incentivizing GHO adoption or for other strategic goals.
Adjust v2 Interest Rate Models
We’ve seen how Frax’s automatic interest rate adjustments proved effective in incentivizing repayments. Abracadabra and Inverse are both considering adjustments to rates as well. Aave could consider adjusting stablecoin borrow rate models to encourage repayment, without significantly burdening other protocol users. This could have the positive side effect of encouraging a broader acceleration in migration to v3.
The simplest, most effective, and least disruptive way to achieve this would be through reductions in the optimal utilization ratio of stablecoin markets (USDT, USDC, DAI, FRAX, sUSD, GUSD, USDP, and LUSD). While the major CRV position is borrowing from the USDT market, adjusting all markets in tandem is recommended to avoid a situation where they are incentivized to shift their borrowed asset from Tether (arguably the safest asset for them to borrow because it is not accepted as collateral) to other riskier collateral assets like USDC or DAI.
With current market utilization of 83.33%, reducing optimal utilization ratio to 70%, while keeping optimal and max borrow rates the same, would have the following impact on USDT:
- Increase variable borrow rate from 22.91% to ~48.43%
- Increase supply rate from 15.63% to ~34.3%
- Increase protocol reserve growth from $10.5 million to $22.3 million per year
The only other option i see is Aave buying a lot CRV in an OTC deal. This way he could repay his loan and we could use the token to boost GHO pools on curve. But it has to be a big deal and a new curve war. What about that?
I like this idea. One of the issues that I’m seeing is that the community doesn’t know what type of off chain communication has been floating around and we also welcome the “user” to come here and have an open discussion. Many of us, AAVE stakers, would love to be part of an OTC deal who can boost GHO’s liquidity far & beyond.
I think we would have enough expert in here who could get in touch to make a deal and communicate with us. Or @michwill just comes here and makes an open offer.