Thanks for making this proposal! I have a few comments on the proposed risk parameters.
Liquidation ratio
I think 75% may be a bit aggressive. This accommodates for up to an additional ~10% price drop for stETH vs ETH (82.5% liquidation ratio), which may be insufficient under adverse market conditions.
Currently the stETH curve pool has very high liquidity, but this is dependent on users being able to earn excess returns - the LDO + CRV rewards need to be at least 50% of stETH staking rewards or it would be more profitable to hold the assets individually. This creates some risk of changes in rewards allocations from Curve and Lido governance.
If pool liquidity thins out due to lower rewards or higher alternative returns for ETH, it’s possible for liquidations to cause large price impact. This blow out risk becomes relatively more severe as the price discount grows as well, because Curve pools concentrate liquidity around the 1:1 price ratio leaving less liquidity for the tail end of the price spectrum.
Aave doesn’t have the benefit of debt ceilings (although exposure ceiling may be available in the future). Aave is therefore unable to limit market impact directly by limiting debt exposure, and needs to choose liquidation ratios that are sufficiently conservative to liquidate any size position.
I think a 60% max LTV and 65% liquidation ratio would be more appropriate. This would accommodate for up to a 21% price discount vs ETH, which should be enough to incentivize buyers even during a sharp market downturn.
Liquidation bonus
Liquidation bonus needs to be large enough to ensure liquidations are profitable, accounting for gas costs as well as market impact. For small positions, the additional gas required to swap stETH to ETH could be problematic. For larger positions, and particularly if stETH is already trading at a discount (due to the Curve amplification noted above), 5% may not be enough to cover the market impact of immediately dumping stETH back to ETH.
I think a 10% liquidation bonus would be more conservative and safer for the protocol, while having a limited adverse impact on borrowers (as most users manage their position responsibly to avoid liquidation).