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.
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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.
3 Likes
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
4 Likes
Support on:
- 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.
15 Likes
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.
3 Likes
We are preparing and testing an AIP to freeze CRV on Aave v2 given the comments above.
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Wallet Update
An additional 5m USDT has been repaid.
An additional 10m $CRV has been redeemed.
Borrow Balance: $49.2M.
4 Likes
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
Upside:
- 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)
Downside:
- 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)
LT decrease
Upside:
- 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
Downside:
- 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.
Other Potential Parameter Changes
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
7 Likes
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?
2 Likes
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.
1 Like
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.
1 Like
With our knowledge of DeFi ecosystem and our experience in the traditional financial sector, we are participating in this debate to share our modest opinion on how to resolve this delicate situation that has been exacerbated by this Vyper bug.
1) Disable CRV lending on Ethereum and Polygon V3 deployment
In order to reduce the risk of a token like CRV experiencing liquidity problems underscored by a security bug event, resulting in a drop in price of CRV, its lending should be disabled on Ethereum and Polygon V3 as it was in Ethereum V2.
2) LTV → 0 as proposed by Gauntlet in mid-June 2023.
Taking LTV to 0 will not immediately lead to the liquidation of Egorov’s position, only if LT is lowered to 0.LT should also be gradually reduced. Consequently, this proposal makes no sense without an agreed-upon payment plan with Egorov, because it will not solve the problem, but will aggravate it and drag other DeFi protocols down.
By reducing LT gradually with a plan agreed upon with Egorov, where Egorov can exchange part of the CRVs for USDT even if it is done OTC, the debt can be eliminated without causing a liquidation that will accelerate the liquidation and cause other Defi protocols to be dragged down.
Another way is to make OTC of CRV for ETH and wBTC to diversify the guarantee with more liquid assets and thus there is no pressure in the liquidation and we would reduce the danger. We could buy more time for liquidation by reducing your risk.
It is necessary to ask Egorov to increase the guarantees with assets other than CRV, such as assets in the V2 etherum market, or refinance the operation with even an RWA owned by Egorov and thus plan the elimination of debt.
3) Freeze of the CRV market.
Market freeze would prevent CRV depositing. We should allow CRVs to be deposited to help increase collateral.
Many thanks
Initial proposal written in Spanish,
En primer lugar, les pido disculpas por contestar en español, cuando el idioma del foro es en ingles.
Nuestra experiencia en el sector financiero tradicional y nuestro profundo conocimiento del ecosistema DeFi nos ha hecho participar en este debate para ofrecer nuestra modesta opinión para solucionar esta delicada situación que se ha acelerado con el bug de vyper.
1) Deshabilitar préstamos de CRV en la implementación de Ethereum y Polygon V3
Parece sensato reducir el riesgo de un token como el CRV que atraviesa problemas de liquidez acentuado por el evento de bug de seguridad, ya que eso puede ejercer a la baja el precio del CRV por lo que me parece necesario deshabilitar préstamos de CRV en Ethereum y Polygon V3 como ya se hizo en Ethereum V2.
2) LTV → 0 como proponía Gauntlet a mitad de junio 2023.
Llevar LTV a 0 inmediatamente llevará a la liquidación de la posición de Egorov. Por lo que sin que haya un plan de pagos consensuado con Egorov no tiene sentido esta propuesta que no solucionará el problema sino que lo agravará y arrastrará otros protocolos DeFi.
Llevar LTV a 0 paulatinamente con un plan consensuado con Egorov, donde Egorov pueda deshacerse de parte de los CRV y cambiarlos por USDT aunque sea con OTC sería la forma adecuada de eliminar la deuda sin provocar una liquidación que acelerará la liquidación y arrastrará a otros protocolos DeFi.
Deberíamos pedir a Egorov que aumente las garantías con un activo diferente a CRV debería ser con otros tipos de activos incluido en el mercado de etherum V2 o refinanciando la operación con incluso un RWA propiedad de Egorov y así planificar la eliminación de la deuda.
3) Congelación del mercado CRV
La congelación del mercado evitaría depositar CRV. Deberíamos permitir que se puedan depositar CRV para ayudar a aumentar la garantía.
Gracias, seguro que de una manera u otra se solucionará esta delicada situación.
1 Like
Aho! I’m new to this forum, but my entity has held AAVE on the SM for a long time. I will be more involved in AAVE’s governance from now on.
We are aligned with “BlockAnalitica” and “eboado” analysis, we are in support of:
- LTV to zero.
- Freezing CRV on Aave v2.
- Disabling borrowing of CRV on Aave v3.
- Increase CRV Liquidation Penalty: We need to think about this thoroughly, and we should present some scenarios here; is not a minor change.
- Adjust v2 Interest Rate Models: This is a crucial thing and a major opportunity for the DAO to incentives the “big migration” from v2 and v3. We would love to get the opinion of @ChaosLabs and @Gauntlet on this vital implementation.
Thanks, everyone; we are together to find a viable solution to this unforeseen situation.
3 Likes
Having considered the global community sentiment.
The ACI, while still believing the next course of action in the immediate term is not specific actions. Will respect community consensus.
We will cast a YAE vote to @Gauntlet AIP on LTV → 0. We are thankful for all community participation and overall high-quality discussion on this heated topic.
5 Likes
I would like to bring this up again. @MarcZeller @Flipside @0xkeyrock.eth and all the others (sorry for not tagging).
Should we consider buying up more CRV to boost GHO pools in the future? We already have liquid CRV token.
This could be a win win situation for all of us and gives us all some more time and relief in the current situation.
Some analysis would be great here.
4 Likes
This is an interesting option, but I’m not sure how the protocol should approach OTC deals like this. Would a “treasury swap” similar to what was done with Balancer be the preferred route?
It’s being discussed here: [ARFC] Acquire CRV with treasury USDT
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Which team are you referring to? There is no team. This is a DAO. There won’t be someone acting in his name making a trade and then transferring the funds to the treasury.
1 Like
Summary
- Freezing and setting LTV->0 will have little impact.
- Aave can’t be as aggressive as other protocols due to the outsized CRV exposure.
- CRV collateral will rapidly lose value if this position nears liquidation. It’s in Aave’s best interest that the CRV market remains healthy as the user winds down their position.
CRV Market Freeze
There’s a growing narrative in the forums that freezing the CRV market prevents further borrowing. Unfortunately, that’s not the case. Even if we were to enforce an immediate freeze, the wallet’s health score is still ~1.83. An additional ~33.5m USD can be borrowed at current CRV prices. Similarly, while a freeze will prevent further CRV deposits, it does not afford guarantees in significantly curtailing the existing credit line. It prevents the user from top-ups aimed at maintaining health levels. The user in question has been repaying significant debt over the past few days, and redeeming CRV, minimizing Aave’s CRV exposure.
LTV->0
The proposal to set LTV to 0 is at the AIP stage and is expected to be approved and executed in the next few days. Regrettably, a technical limitation in V2 means that setting LTV to zero does not inhibit additional borrowing, as mentioned in previous discussions. As a result, this change will have a limited impact and doesn’t offer us any assurances or reduce our exposure.
Why Aren’t We As Aggressive As Other Protocols?
Aave’s exposure to CRV exceeds that of the second-largest protocol by ~5x. We can exert aggressive pressure on the position towards liquidation, but the CRV market is illiquid at a significant size. Although there seems to be an OTC market for Curve at $0.40, we doubt that current demand can currently cover the borrower’s entire position. Aave and our industry’s collective interest is for CRV to weather this storm. In fact, the market is pricing it as such, as the AAVE/CRV correlation has been 0.92 over the past week.
We aim for Aave to retain collateral of value, affording the borrower optionality to repay depositors and prevent a shortfall event.
Why Does Aave Benefit From This Position Maintaining Its Health
As the position reaches liquidation, liquidity on the ask side will lessen. Even without extreme volatility, the ±2% order book depth is ~350K and ~590K USD on the Binance CRV/USDT spot market.
A healthy CRV market benefits Aave and maximizes the probability of recovering the debt.
Collaborating with the Borrower
The technical limitations of V2 mean we need to find another solution to minimize the risk CRV poses to Aave. Fortunately, this situation is one where we know who the borrower is. Aave community members communicate with him and think that with some finesse, we can come to a reasonable conclusion to this episode.
It’s also important to note that the borrower has been liquidating sizable chunks of CRV via OTC over the past few days and repaying debt. We’re hopeful this trend continues.
Next Steps
- Chaos Labs is preparing AIPs to disable borrows on V3 Ethereum and Polygon.
- When markets stabilize, we will continue our series of incremental LT reductions to wind down the CRV V2 ETH market.
- In collaboration with @Gauntlet, we support reducing CRV LT on Ethereum V3.
As always, we’re available; feel free to reach out if you have any questions.
12 Likes
thanks @ChaosLabs for this valuable summary.
The ACI will sound like a broken record, but we still believe the most viable strategy is to reduce LT every week until LT reaches zero gradually.
This will be predictable and will allow borrowers to reduce debt in the least painful manner gradually.
The ACI favors a “soft” program that doesn’t exceed 3-5% reduction per week allowing a bit more than a quarter to reduce the CRV collateral for the debt to zero.
Once the situation is normalized, CRV should only have a future in V3, and V2 users should be encouraged to adopt V3 by raising RFs & gradual reduction of LT on all V2 assets.
7 Likes