[Temp Check] Onboard OpenBlock as Aave Risk Service Provider

Governance
1

[Temp Check] Onboard OpenBlock as Aave Risk Service Provider

Author: OpenBlock

Date: 2024-03-29

Summary

OpenBlock Labs is excited to submit a proposal for a 6-month engagement to assist the Aave DAO with risk management. OpenBlock is an established provider of economic modeling for leading protocols in the space, including: EigenLayer, Lido, Arbitrum, Solana, Sui, Uniswap, Scroll, Fuel, Linea, Mode, and many others; we have also received a small grant in the past to study incentives on Aave. OpenBlock Labs is based in San Francisco, CA, dedicated to fostering sustainable growth within decentralized protocols through a data-driven platform.

Motivation

OpenBlock is backed by notable figures in the crypto space, including: Foundation Capital, Electric Capital, Circle Ventures, AlleyCorp, and others. Our team of 40+ has backgrounds from Stanford, a16z, Carnegie Mellon, Meta, Palantir, and other top-tier institutions; the highly technical background of our team makes us confident that OpenBlock is uniquely positioned to tackle a problem of this nature.

OpenBlock brings a distinctive advantage to Aave by harnessing its deep expertise in LSTs, which dominate the supplies of Aave. Our extensive liquidity modeling has delved into the intricate dynamics between LSTs and lending activities. Additionally, OpenBlock is at the forefront of LRT analysis, which will be a critical asset class for Aave to maintain its dominance in the market. We believe our unparalleled expertise in this domain will allow Aave to be a first mover with LRT integrations, while upholding rigorous risk assessment standards

Before OpenBlock pivoted to economic modeling, it served as a core contributor to Delta One—a stablecoin backed by delta-neutral liquidity positions. Through rigorous backtesting and simulations on the risks associated with these LP positions, we developed valuable insights on the market dynamics of a stablecoin. While the protocol is now deprecated, our team possesses unique expertise derived from firsthand experience in supporting a market akin to GHO. This experience was instrumental in initiating collaboration with the Lido DAO to manage their DEX liquidity, and we have since applied this expertise to an assortment of top protocols. In short, OpenBlock is very well-suited for assisting Aave in both GHO and LRTs, as both assets will play crucial roles in the protocol’s growth.

Specification

OpenBlock will conduct a continuous analysis of new asset listings and propose adjustments based on a number of factors including, but not limited to:

  • Market Risk: We will leverage time-series analysis to assess liquidity trends, employing econometric models like GARCH to account for volatility clustering in liquidity and volume. This will enable us to forecast liquidity scenarios and ascertain liquidity risks associated with each token.
  • Agent-Based and Monte Carlo Simulation: Simulating short-term dynamics like liquidation cascades, such as those driven by liquidator bots with established arbitrage strategies, will be central to our modeling. We also plan to observe the behavior of various network participants, and how they have previously reacted to market events. These interactions will provide insights into how the Aave platform might evolve over time and how various factors could impact its security and asset distribution. Monte Carlo simulations can help predict different scenarios, considering factors such as protocol upgrades, changes in market conditions, and variations in user behavior. These models will provide us with a probabilistic understanding of outcomes and value-at-risk.
  • Counterparty Risk: Counterparty risk pertains to the governance of a given asset and degree of centralization. It is assessed based on factors such as: the level of decentralization of the asset’s governance (measured by power law distribution and Gini coefficient calculations), historical security measures taken by the protocol (smart contract audits, economic simulations), smart contract functionality and complexity (enabling withdrawals, supply caps, whitelists), historical risk mitigation in black swan events (kill-switches, speed of governance, depegging scenarios), the number of holders of the asset, and the general market sentiment of the project.
  • Other: OpenBlock will also offer parameter recommendations, considering it is a fundamental aspect of risk management. OpenBlock will also undertake essential tasks such as robust analyses for GHO collateral, active participation in governance discussions, general advisory on incentive programs, collaboration with other service providers, regular updates from our forward-deployed engineers, and comprehensive community analytics.

We outline some of our past work on these topics below.

Past Experience: EigenLayer

OpenBlock has diligently conducted comprehensive data collection and monitoring of staking dynamics in our engagement with EigenLayer. Furthermore, we’ve executed Monte Carlo simulations to forecast staking behavior among validators and LSTs. Our platform offers unparalleled insights into liquid restaking tokens (LRTs) and their liquidity levels across various DeFi integrations. Our ability to remain current on emerging asset classes will prove invaluable for meeting Aave’s risk management requirements.

Past Experience: Lido

When engaging with Lido, OpenBlock utilized advanced data intelligence and modeling to research the dynamics of on-chain liquidity providers and traders of Lido’s stETH. In completing this analysis, we studied the liquidity needs of potential liquidations on Aave, and built models to recommend incentives to attract sufficient DEX liquidity for these markets. OpenBlock’s volume profiling models discovered much of the volume was driven by bots engaging in risk-free arbitrage using stale prices from LPs. This finding was crucial in preventing Lido from continuing to incentivize LPs under the false assumption that the volume was organically increasing.

Past Experience: Arbitrum

OpenBlock’s engagement with the Arbitrum DAO has spanned three initiatives: STIP, Backfund, and LTIPP. The consistent renewals showcase OpenBlock’s dedicated nature to an ecosystem, and the level of excellence we strive to achieve. This initiative also highlights OpenBlock’s resilience in engaging with a diverse and vocal community, committing to bi-weekly updates with diligent insights. Our team actively participates in working group calls and offers invaluable guidance as trusted advisors in DAO deliberations. Lastly, we understand the paramount importance of high-integrity data when making pivotal decisions within DAOs, whether it is risk assessment or incentive optimization; our performance for Arbitrum is a testament to the high caliber we consistently uphold in our operations. The public, open-source dashboards are available here.

Duration & Proposed Budget

Implementation Fee (~$40k per month):

  • Full-time Data Scientist: ~$15k per month
  • Full-time Quantitative Researcher: ~$15k per month
  • Part-time Project Manager: ~$10k per month

OpenBlock Platform Fee (~$18k per month)

  • Includes access to exclusive OBL methodologies, models, and datasets (liquidity models, opportunity cost of capital, elasticity, competitive intelligence, incentive optimization, etc.). These models are being regularly updated by a team of leading data scientists and quantitative researchers.
  • Offers a dependable data analytics and risk monitoring platform with unlimited seats.

Total: $350,000 for 6 months

Useful Links:

https://www.openblocklabs.com/

Next Steps

  1. If consensus is reached on this [TEMP CHECK], escalate this proposal to the Snapshot stage.
  2. If the Snapshot outcome is YAE, this proposal will be escalated to ARFC stage
  3. Publication of a standard ARFC, collect community & service providers feedback before escalating proposal to ARFC snapshot stage
  4. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal

Copyright:

Copyright and related rights waived under CC0

1 Like
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Hello,

With the ACI we’ll be supportive of this TEMP CHECK, As we have 3 different proposals for a Risk service provider slot,

We do not consider an efficient ressource allocation to have more than two Risk service providers.

We suggest that at ARFC stage, the candidates that received a positive TEMP CHECK snapshot vote outcome to be in sync at ARFC to ensure equal opportunity and representation and allow everyone to have a fair shot to present their SP candidacy to the Aave community.

After a sufficient debate period, we suggest a single ranked voting ARFC snapshot vote to allow governance to express their preference.

3 Likes
3

We agree with the ACI in this case, prospective risk service providers should be put to a final Snapshot vote to determine which service provider will be engaged by the DAO.

2 Likes
4

The current proposal has been escalated to TEMP CHECK Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

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OpenBlock’s expertise is definitely to be commended, especially considering their 40+ strong team with impressive professional backgrounds. Their LST and LRT expertise will be very valuable going forward. However, we have several concerns about their proposal and scope, especially in comparison with that of Allez Labs and LlamaRisk:

  • OpenBlock does not have a specific focus on GHO and this is one of the key aspects that the DAO needs to focus on now.
  • The budget is higher than the other risk providers (LlamaRisk and Allez Labs) but it is not especially clear as to why.
  • The scope does not see OpenBlock providing input into parameter recommendations for Aave v3.
  • OpenBlock’s LST and LRT expertise will be beneficial for Aave, but it is not clear why Chaos Labs cannot perform the same role.
  • In comparison with the other proposed solutions, OpenBlock’s scope seems the least comprehensive.

As such, we will vote NO on this TEMP CHECK to onboard OpenBlock and would like to further assess LlamaRisk and Allez Labs in the ARFC phase.

3 Likes
6

Hi Sid,

Thank you for your feedback. Allow us to address some key points for clarity.

  • Before OpenBlock pivoted to economic modeling, it served as a contributor to Delta One—a stablecoin backed by delta-neutral liquidity positions. Through rigorous backtesting and simulations on the risks associated with these LP positions, we developed valuable insights on the market dynamics of a stablecoin. While the protocol is now deprecated, our team possesses unique expertise derived from firsthand experience in supporting a market akin to GHO. This experience was instrumental in initiating collaboration with the Lido DAO to manage their DEX liquidity, and we have since applied this expertise to an assortment of top protocols. In short, OpenBlock is very well-suited for assisting Aave in both GHO and LRTs, as both assets will play crucial roles in the protocol’s growth.
  • When seeking funding from a DAO, our aim is to reinvest profits into our product to enhance the offering for the DAO’s benefit. Our team is extremely selective in our hiring process, and we ensure full-time support for our customers; the talent we can use to support this offering is a direct result of our funding from customers. While this requires a level of trust, our proven track record with some of the largest ecosystems and protocols in the space underscores our commitment. To further demonstrate our confidence, we’re willing to discount our proposal to $350,000 for the initial 6-month period.
  • We assumed it was evident that OpenBlock would offer parameter recommendations, considering it’s a fundamental aspect of risk management. In addition to the scope outlined in our post, it’s important to note that OpenBlock will also undertake essential tasks such as robust analyses for GHO collateral, active participation in governance discussions, general advisory on incentive programs, collaboration with other service providers, regular updates from our forward-deployed engineers, and comprehensive community analytics.

We appreciate the opportunity to address these points and welcome further feedback from the community.

2 Likes
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