Chaos Labs supports the Cross-Chain GHO Strategy through the CCIP integration. However, we agree with the strategy proposed by BGD through a.DI, i.e., leveraging an aggregate approach following the canonical bridge implementation, aiming to maximize security while minimizing latency.
Aave DAO Permissions:
In the context of governance permissions pertaining to GHO facilitator capacity and rate limiting parameterization, the alignment of such parameters must be continuously considered from the relative lens of GHO circulating supply. The fragmentation of GHO liquidity must be concentrated around Ethereum itself in percent terms rather than distributed across multiple chains due to the GHO liquidity contingency in the event of a market downturn. As GHO is only mintable on Ethereum itself, GHO liquidity incentives tailored to utilization on external chains should reflect an adequate buffer in maintaining most GHO activity on Ethereum. This buffer is essential to ensure targeted liquidity distribution and enhance resilience in the face of potential market fluctuations.
Current GHO Liquidity Distribution:
Following the introduction of the stkGHO incentive plan (marked by the red line), there’s a noticeable reduction in GHO availability in liquidity pools. This decrease, influenced by peg corrections and improved yields for liquidity pool depositors, has reached 50% over the past week and a half.
Currently, around 40% of all minted GHO, which amounts to 14 million, has been placed in stkGHO, serving as “idle” liquidity. With the anticipated increase in the GHO minting cap, stkGHO is expected to expand, driven by its current yield of 11% APR.
GHO Liquidations:
With the passing of this proposal, GHO will functionally become the only cross-chain collateralized debt position (CDP) stablecoin that employs a first-come-first-serve fixed liquidation bonus as an incentive for liquidators while only allowing new issuance on Ethereum. CDP stablecoins such as MIM and MAI may employ fixed LBs while cross-chain, however minting occurs on any given chain, leveraging the underlying liquidity on said chain in the context of liquidations. DAI, LUSD, and crvUSD, on the other hand, while only issued on Ethereum, do not employ traditional liquidation mechanisms but rather some iteration with respect to time, or an idle “stability pool” in LUSD’s case. Thus, the carefully crafted allocation of liquidity incentives is crucial, especially in the genesis stage.
In a swift market downturn, the expectation is for GHO minters, irrespective of the source chain, to repay debts on native Ethereum concurrent with active liquidation by liquidators and withdrawal of GHO by liquidity providers. Insufficient liquidity on Ethereum, stemming from the uneven distribution of GHO across various chains and/or potentially misaligned incentives on Ethereum itself, can be exacerbated. Large GHO debt distributed on other chains may necessitate tapping into Ethereum’s GHO liquidity for rapid debt repayment or pose a theoretical challenge for liquidators attempting to liquidate from a more extensive, effectively cross-chain debt pool. This could result in a lack of an incentive to liquidate positions due to the upward market price deviation from the underlying price of $1 within the protocol.
The current distribution of “GHO at Risk,” collateralized by non-stablecoins, is presently within reasonable bounds concerning GHO’s existing liquidity. However, the risk associated with “GHO at Risk” may intensify due to the increasing cumulative exposure alongside the relative stagnation of GHO liquidity on Ethereum. Monitoring and addressing this trend becomes crucial to mitigate any adverse effects on the overall stability and risk profile of the GHO system.
Ethereum → Other Chains:
We suggest flexibly adjusting facilitator caps based on the cumulative distribution of GHO CDPs and the targeted Ethereum liquidity ratio, including the GSM, with respect to the total GHO circulation.
Rate limiting for transfers from Ethereum to other chains should consider GHO interest rates. High interest rates, generally indicating GHO’s value is below $1, suggest ample GHO liquidity, warranting a more lenient rate-limiting strategy. On the other hand, low interest rates, aiming to boost GHO demand and indicating its value is likely above $1, call for tighter rate limits to prevent excess supply in the market.
Other Chains → Ethereum:
When managing rate limits from other chains to Ethereum, the approach should be more permissive, especially during market downturns where settling GHO debt swiftly is crucial. In such situations, easing rate limits poses few risks since Ethereum acts as the central hub for managing GHO debt, ensuring an optimal balance between user experience and protocol security.