[TEMP CHECK] BGD. Further Aave v1 deprecation strategy

Development
5

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).