[TEMP CHECK] BGD. Further Aave v1 deprecation strategy


Title: [TEMP CHECK] Further Aave v1 deprecation strategy

Author: BGD Labs @bgdlabs

Date: 2023-12-20



Summary

Approve further steps of Aave v1 off-boarding, to reduce operational overhead on deprecated Aave instances.


Motivation

The Aave protocol v1 was released in January 2020 and eventually superseded by Aave protocol v2 in December on the same year.

While Aave v1 has been deprecated for a long time, some liquidity is still stuck on the protocol. Even if this instance is not covered by the Aave Safety Module, being part of Aave, it still is monitored and evaluated whenever development and/or security decisions are made.

This creates meaningful overhead for all involved development & security teams, which directly adds cost to the Aave DAO. Additionally, the architecture of Aave v1 is quite different to Aave v2 & v3, making it the most ad-hoc instance of Aave.

For the previous reasons, we think the community should evaluate approving extra off-boarding steps.


Specification

To achieve a complete off-boarding of Aave v1, the following needs to be completed:

  • All debt has to be settled, in order to allow liquidity providers on v1 to withdraw.
  • All assets have to be withdrawn.

To minimise the impact on users we propose a phased approach, where each phase could last in the order of 1-3 weeks.

Phase 1

In a first phase we recommend to upgrade the liquidation mechanism on the protocol in the following ways:

  • It should no longer be possible to receive aTokens for liquidations (as the goal is to remove liquidity, not transfer it from user to user).
  • It should be possible to liquidate healthy (collateralised) positions with a fixed liquidationBonus (e.g. 1%). This value should be small to not hurt borrowers, while still being big enough to incentivise liquidations. If this Temp Check is successful, we will confirm the number with risk providers., but 1% at the current moment would make the liquidation profitable for approximately 85% of the positions to liquidate.
  • It should be possible to liquidate a entire position at once (currently on Aave v1 only 50% of a position can be liquidated).
  • Interest rates should be lowered to the minimum, as the previously described always-enabled dynamics remove any need of utilisation dynamics.
  • Remove flash loan fee, as there should not be extra incentives for liquidity providers.

Phase 2

In a second phase we recommend increasing the fixed liquidationBonus to a higher percentage.

The exact number must be chosen based on current market conditions to minimise user impact, but allow economical liquidations.

Phase 3

Once the big majority of debt is repaid, we recommend to introduce a forced withdrawal mechanism. With forced withdrawals anybody could withdraw on behalf of any liquidity provider on Aave v1, with the funds received by the holder of the aToken.

It is important to clarify that further technical aspects on this should be analysed before executing this step, for example smart contracts receiving funds without triggering a withdrawal.




After all the Phases are finished, additional ad-hoc steps can be executed, like Rescue Mission for locked funds.


Next Steps

First, we will create a Temp Check Snapshot, following the governance framework and standards of the community for a proposal like this one.

If approved, we will proceed with an ARFC, with the final steps including feedback from risk service providers, and precise technical decisions.

Finally, AIPs will be created for the different phases.


Copyright

Copyright and related rights waived via CC0 .

6 Likes

Following the plan, we have created a TEMP CHECK Snapshot for the community to pre-approve the initial roadmap on the v1 deprecation, with vote starting tomorrow.

Participate :ghost:
https://snapshot.org/#/aave.eth/proposal/0x7451f00809986c7cb8cce7ef4587efdfedad06089ebf2851d64122d00b035d9c

1 Like

After the pre-approval on Snapshot, and given that each one of the Phases will be pretty granular and with time in between, we think it is appropriate in this case to proceed with the AIP for Phase 1.


To highlight, what will happen in Phase 1 is the following:

  • On liquidations, it will not be possible to receive aTokens anymore.
  • In order to force off-boarding, it will be possible to liquidate healthy (collateralised) positions with a fixed liquidationBonus of 1%. This value is as small as possible as to incentivise liquidators, while not hurting borrowers, however, we urge ALL borrowers to migrate their positions to Aave v3 in order to fully avoid liquidation.
  • It will be possible to liquidate a entire position at once (currently on Aave v1 only 50% of a position can be liquidated).
  • All interest rate strategies will be replaced with one with minimal parameters: 1% slope1 and 2% slope2. In practise, this has little influence, as with all positions being liquidated, no healthy borrowings will keep open.
  • Flash loans will be disabled. Initially the idea was to remove the flash loan fee, but given that at this stage integrations should not be depending on Aave v1 flash loans, we think it is reasonable to not introduce overhead and completely disabling them.
5 Likes

Following the procedure, after the pre-approval of the community on Snapshot, we have created an on-chain AIP for the Phase 1 of the further Aave v1 deprecation.

Once again we urge ALL borrowers to migrate their positions to Aave v3 in order to fully avoid liquidation, as the proposal will introduce a new mechanism by which all borrowings are liquidated, with a fixed 1% bonus.

Voting will start in approximately 24h, participate :ghost:
https://vote.onaave.com/proposal/?proposalId=15

2 Likes

The Phase I of this off-boarding process was executed by the Aave Governance a bit more than a week ago(February 6th).

Since then some users have repaid their debt and others got liquidated with a minimal 1% bonus, reducing the outstanding debt by more than $1m from ~$1.6m to ~$550k.




To understand liquidation profitability on Aave protocol v1 (and applicable to the other instances too) one has to consider 3 things:

  • Gas cost of the liquidation action.
  • Liquidation bonus.
  • Position size.

Simplifying, one can say a liquidation is profitable as long as positionSize * liquidationBonus > gasCost .

Given that on Aave v1 there’s no reserve masks or similar optimisation techniques, the gas cost is roughly the same for each position, at around ~1M gas. Sophisticated actors will not only liquidate, but also directly swap the assets/source the liquidity, potentially increasing this cost.


So with a 30 gwei base-fee and $ETH at $2.830,00, this means a liquidation will cost around 0.03 ETH or 85$, causing the following (numbers are not completely exact, but roughly approximated):

  • With the current 1% bonus, it is likely that almost nothing else will be liquidated, given there is only a small number of positions with debt > $10k.
  • With a bonus of 3%, positions > 1 ETH should be profitable to liquidate at current market conditions, which would account for 114 ETH of debt being liquidated.
  • With a bonus of 4% positions > 0.75 ETH should be profitable to liquidate as current market conditions, which would account for 128 ETH of debt being liquidated.



Following the previous analysis, we think it is appropriate to progress to Phase 2 and raise the liquidation penalty to an intermediate level of 3%, not hurting in excess the left users, but still progressing on the off-boarding goal, with estimated extra liquidations of roughly $200k.

In order to give extra time for the community to comment and users to further repay their positions, we target creating a governance proposal end of next week or beginning of the following (week of 26th).

Following the timeline, we have created an on-chain governance proposal to raise the liquidation bonus to an intermediate level of 3%.

Voting will start in 24 hours, participate :ghost:
https://vote.onaave.com/proposal/?proposalId=37

1 Like