[TEMP CHECK] AAVE V3 Harmony Recovery ONE Proposal

Governance
1

Author: [@mbarret3 & @Selvy & RecoveryONE & R1Ambassador]

Date: 2023-12-03

Summary

This proposal addresses the bad debt incurred by the Aave protocol on the Harmony network due to the Horizon Bridge exploit in June 2022. It proposes a solution to remove the bad debt and compensate AAVE holders by creating a fund and allowing token exchange.

Motivation

To gauge community sentiment regarding a proposal to offer a resolution for those affected by the June 2022 Horizon Bridge hack.

  • Context: In June 2022, the Horizon Bridge hack resulted in the exploit of Harmony’s ERC Bridge, leading to a loss of approximately $100 million. This hack caused an excessive printing of assets like 1USDC and 1USDT, devaluing them significantly. Opportunists exploited this by buying these devalued assets at a discount and depositing them into Aave. Despite the devaluation, Aave maintained a 1:1 price ratio for these assets post-hack, allowing users to borrow ONE and drain it completely from the protocol. As of today, 55.42M ONE has been drained from Aave V3 Harmony, bringing the market to a standstill. So we would ask Harmony to add a fund of 5,542,000 ONE and Aave to add 5,542,000 ONE.

  • Impact: Aave currently holds bad debt of approximately $751K due to this exploit. The lack of immediate action by Aave to adjust pricing variables after the hack exacerbated the issue.

Specification

This proposal suggests bad debt removal approach

  • Bad Debt Removal: Create a fund 10% (5,542,000 ONE) from Harmony Recovery ONE and 10% (5,542,000 ONE) from AAVE treasury. * Use this fund so that affected Aave users of Harmony’s Horizon Bridge Hack can withdraw their deposited tokens in exchange for 20% of their original deposit value.

  • Implementation: Aave DAO governance will vote on this proposal. If approved, a smart contract will be deployed to facilitate the token exchange and fund creation.

Disclaimer

This proposal is not without risk and does not guarantee a complete resolution of the bad debt issue. The Aave community is encouraged to carefully consider the potential benefits and drawbacks before voting.

Next Steps

  • Get community feedback on TEMP CHECK
  • Snapshot vote

Copyright

Copyright and related rights waived via CC0.

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@MarcZeller new post.

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Thanks for submitting this TEMP CHECK proposal. The ACI will move this forward with Skyward pending the 5-day review period from the community.

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Hello,

I want to note that I think this proposal is dishonest in its premise and just a resurrection of the previous blame game.

Despite the devaluation, Aave maintained a 1:1 price ratio for these assets post-hack, allowing users to borrow ONE and drain it completely from the protocol.

Like noted and previous post of this type, Aave having 1:1 prices - not only on harmony - is a well known fact and the necessary evil to be remotely usable on smaller chains.
This is not a bug, but a well known design decision by the aave protocol(and others) as otherwise price manipulation would be far too easy.

The lack of immediate action by Aave to adjust pricing variables after the hack exacerbated the issue.

In previous threads where this issue was discussed the image is not so clear in favor of harmony:

  • no-one of harmony reached out at all (not on the forum, and according to the forum no even in private chats - ppl learned of the hack via twitter)
  • for quite some time, harmony let it seem like they would eventually cover the losses keeping all processes in the air (and making non-reaction the correct reaction as this way the pool would have stayed healthy)
  • Harmony who was in control of incentives kept them going for a long time before they eventually pulled them - using exactly 0 WONE to cover any debt (ppl asked were these funds went, but noone ever answered - would be interesting to check, but harmony explorer is hell, so i’ll let this to someone else)
  • All these „recovery“ shenanigans in the harmony ecosystem excluded aWONE holders from participating (first from governance, later from recovery)

Create a fund 10% (5,542,000 ONE) from Harmony Recovery ONE and 10% (5,542,000 ONE) from AAVE treasury.

The AAVE Treasury has exactly 0 ONE.
So I assume this would mean the DAO would need to buy ONE on a secondary market pumping the ONE price?

Overall this approach seems weird to me:
By just providing liquidity ppl will be able to exit yes, but you make exactly 0 progress on the recovery.

Why don’t you just liquidate underwater addresses, or repay on behalf of some - like suggested a few times by various people in various threads.
By doing so, in addition to providing liquidity to users you would also receive 1X tokens in return that you could burn. There’s 0 governance needed for that.

—

I highly doubt this proposal will find support by the community:

While this request is for „just 50k“ it does not cover close to the amount needed so in a few weeks another proposal will come.
Betting on the „good will“ of “Harmony” or „recovery ONE“ to do the right thing afterwards is more then naive, given the track record of ignoring the issue for over a year and doing exactly 0 to reimburse users.

The DAO can not be responsible for a bridge hack :man_shrugging:

—

For me it’s hard to understand how it’s possible that recovery one - after all this time, managed to not liquidate a single $ and provided exactly 0 liquidity to users. It’s not that hard - one could have started/ still start with a few of the wONE that were pulled from the LM to provide some exit liquidity and see how far things go.

Chaos labs has a quite good dashboard to monitor positions: Chaos Labs
You could just liquidate any of the underwaterpositions with wONE borrows.

Disclosure. This comment reflects my opinion as a community member and does not represent any service provider I am engaged with or have been engaged with in the past

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Thank you, ACI. The Recovery One Foundation and our Ambassadors are committed to finding a solution that is fair and conscientious.

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sakulstra, Thank you for your interest in this discussion, and your feedback and insights. We acknowledge the complexities, especially regarding Aave’s decisions and Harmony’s response.

I represent the Recovery One Foundation, a community-led organization that has been facilitating recovery on Harmony since the hack. We have documented our process since the beginning and are committed to finding a solution. (You can view our work here: Recovery One – Medium).

Our proposal aims to initiate constructive dialogue and explore viable solutions. We’re open to suggestions and keen to collaborate on refining our approach for the community’s benefit.

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This TEMP CHECK has been escalated to the TEMP CHECK Snapshot stage and vote will start tomorrow.

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The proposal though, does not attest this.
One doesn’t need to insinuate things here to read this proposal text as: “Aave reacted to slow”, “Aave used unfit oracles” as the whole text leaves out any involvement or accountability on the Harmony side.

To me this doesn’t really look like “committed to finding a solution”.
You want to develop some custom contract deployed on a chain, with an explorer that has no functional verification.
In the end result - if i correctly understand - you force ppl to chose between accepting 80% loss or losing everything (funny enough in this scenario the only users incentivized to interact with the “recovery” are the ppl who have 0 trust in recovery).

There has been so much discussion on this, without any action following.
Last time the feedback ended up in some weird chatgpt summary without anything ever happening.

If the goal really is to start a dialog, let me start by re-summarizing what I personally think have been the most promising suggestions (all of this has been suggested in one form or another).

  1. Use the funds pulled from the rewards and/or some subset of the funds used in the rounds to liquidating users - receiving de-pegged tokens to burn and providing exit liquidity to users.

Once this is done/started and Harmony/Recovery One has shown some basic actions I think things that could be reasonable, and find support:

  1. In the past teams involved in treasury management (e.g. llama) completely ignored harmony - i guess it’s safe to assume for the DAO the funds are lost anyways. Therefore one could ask the DAO to burn the harmony treasury assets. It’s more than 3.5% of the current total pool assets (reducing awONE to cover by 2.5M).

  2. By my understanding of the aave protocol one step to help the recovery to be more efficient in liquidations is by decreasing the Liquidation Threshold of assets (as more accounts borrowing wONE get liquidatable if they don’t repay) and increasing the Liquidation Bonus (so Recovery One or whoever receives more depegged assets in return).

Probably it also wouldn’t hurt to look a bit deeper into the actual positions.

I had a very brief look at the first page of wONE borrowers on Chaos Labs and it seems that at least some subset of the vWONE debt is leveraged against aWONE so it zeros itself out, reducing the actual debt to cover.

  • 0xc5543b3a2973dd3b9d156376e1e8e7d0dcac3664 (18k)
  • 0x78b348195f53f526889bde7e478d1a5d4bf041bd (1.1M)
  • 0x2dd5a62a5d4e4d20622061c823f9648e3078012d (352k)
  • 0x4d18f430055f1404e32069288d55350782cd1cfa (125k)
  • 0xee4333d7b8f8a23f88cdd88940193d5de3d12cb0 (40k)

… anyhow as noted above there’s more then a year ppl putting energy in discussions and coming up with suggestions that in the end never resulted in any progress on the Harmony side. Therefore I strongly suggest to go with just 1) and once some minimal progress is done gauge on how things could be improved.

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What about the proposal that would actually aim to compensate the victims? I don’t understand who is “AAVE holder” and why they are involved in this?

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Sakulstra, thank you for your continued interest, as we both aim to reach a fair resolution. The way that we differ is that we also seek a resolution that is consistent with broader recovery efforts.

1.) This proposal distributes responsibility and offers a way to move forward, avoiding dwelling on the past.
2.) For Aave, the solution will involve a new medium. We’re not suggesting that the exchange occur on the existing infrastructure (recovery.exchange). It could be an entirely new avenue for Aave. The proposal aligns with ongoing recovery efforts and exchange rates influenced by market forces. Regarding forcing people into a decision, we are offering them a choice. While I don’t expect everyone to choose this option, it’s a start, and we anticipate many will opt for the 20% rate, which is 10% above the market price for de-pegged assets.
3.) This is why we are advancing this proposal with the support of the Aave community to a snapshot vote. We are here to take action. We began brainstorming solutions months ago.
4.) This is an intriguing idea and aspect worth exploring and potentially incorporating into the solution: “Use the funds pulled from the rewards and/or a portion of the funds used in the rounds for liquidating users - receiving de-pegged tokens to burn and providing exit liquidity to users.”

Sakulstra, here is my Telegram (Telegram: Contact @matthewtbarrett). Please message me. Thanks!

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P5555A, I got it, and yes, there is a significant distinction in language that requires clarification. Instead of “Aave holders,” we meant “Aave users,” or more accurately, “affected Aave users of Harmony’s Horizon Bridge Hack.”

Thank you for the feedback.

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Ok, thank you for the clarification.

My second point is that I don’t think that ONE tokens should go via 20% route because they are not depegged, since they are native gas token to Harmony One chain.

I’d suggest 2 different mechanisms for ONE token and for the ones that suffered from the depeg.

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Yeap, i agree with you. As an AAVE user and ONE token holder, i just deposited my ONE tokens in AAVE, and ONE token is not depegged. But finally i lost 80% value of my asset(that is all ONE tokens). is it right?

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Further questions from my side:

  1. What is the sentiment about this from Harmony One blockchain leadership? Have they accepted this from the financial point of view? Or the plan is to check sentiment with the AAVE voters first?

  2. Your proposal states “Use this fund so that Aave holders can withdraw their deposited tokens in exchange for 20% of their original deposit value.”. And then what? What happens with remaining 80%? Please state clearly the intentions here as I don’t see how victims can have opinion about this unless it is titled 'Partial (20%) compensation".

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Thank you all for discussing the issue. The temp check vote (expectedly) is all NAY.

Could we explore some gradual solution, similar to Recovery One process that would over time deposit ONE into Aave V3, up until bad debt is gone? Then there won’t be a need for any smart contract change on AAVE’s side (apart from enabling withdrawals) and the victims of bad debt who are following this will have a chance to withdraw on a first-come-first-served basis. (I imagine most just wrote it off as a loss and forgot about it at this point)

Where these gradual deposits of ONE will come from is an important question (Recovery One, AAVE’s harmony treasury as mentioned above, etc), but as a mechanism, I think the above would be a fairer way to prioritize users following this effort after a year and a half.

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P5555A & Yuyi we understand. However, these tokens were in the Aave protocol, which was impacted by the hack, and are included in our recovery efforts now.

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P5555A,

  1. The Harmony core team supports the efforts of Recovery One, and HIP-30v2 was a significant initiative that solidified our recovery methods.
  2. We are proposing a framework consistent with the ongoing recovery efforts on the Harmony blockchain. For context, please refer to our summary documentation. We have completed 14 successful rounds of recovery, and the exchange rate for all recovery efforts is currently less than 10%. For more information, visit: https://medium.com/@recoveryonefoundation.

Once again this framework provides an option for individuals stuck on Aave to exit. As stated before we don’t expect everyone to take this option but it’s a start. We are also open to a secondary mechanism that initiates the liquidation process.

Let’s continue to have constructive and practical solutions, consistent with the ongoing recovery, to start the recovery process here.

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Thank you for the update. Snapshot

We are happy to explore solutions that are consistent with the ongoing recovery efforts.

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Hello ALL :wave:
I’m Erik from R1Ambassadors on HarmonyONE. I’ve read the comments above and have a couple potential suggestions. What if we were able to offer a choice for *Affected AAVE users.
We could have BOTH

  1. An option to Exchange, instantly, at the "suggested 20% rate.
    Or
  2. Use an Exchange similar to the recovery.exchange. Where Affected Token Holders could Exchange assets on a monthly basis. (Exchang rate TBD)
    I believe the HarmonyONE plan, potentially has 3 more years.

Lastly, I’m just offering a new voice, in this discussion. This isn’t a predetermined statement. Rather my own personal Statement/ Suggestion.

(Also I’m not a Developer, so I’m not 100% if this is possibly)

I’m hopeful that we’ll be able to find a solution :blue_heart:

Thanks for your time,
Erik

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Sorry but i won’t join any private conversations with Harmony/Recovery One. Happy to help publicly here on the forum though, in case you need data(i know my way around chaos dashboard / thegraph) or guidance on how to liquidate.

The Aave treasury acts like a user on the protocol and therefore lost all valuable assets in the bridge hack (like the users). The only thing the AAVE DAO could do on Harmony would be burning their claim on borrowed out assets (e.g. burning 2.5M aWONE, 3.6k aLINK) - reducing the amount the recovery has to recover and burning the depegged assets it holds (1USDC, 1ETH, 1WBTC, 1DAI, 1TUSD).

Just for my understanding, does this mean “broader recovery efforts” aims to “recover assets over a period of 4 years, only if users are willing to accept 80% loss” (for me this second part of the sentence was not clear when reading things on the harmony forum.

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