[TEMP CHECK] Safety Module Upgrade Part II - Asset Diversity, SM Categories & Slashing Updates

[Dydymoon]

Hey @BarryLime thanks for the feedback !

@BarryLime

1. I think we should consider the safety module not just as a mitigation tool for a shortfall event, but also as a way to optimally allocate $AAVE incentives.

Definitely agree here, and this is a major part of the SM Upgrade proposal. You can find the details in Part IV, but I’ll provide more details below.

@BarryLime

While ETH and wstETH are pristine collateral from a security perspective, incentivizing them in the safety module offers no strategic benefit to the DAO. Maybe one could argue that we really should have at least some of it for safety – if that’s the case, totally fine, but we should be thoughtful and only allocate limited incentives (i.e. the bare minimum to achieve whatever level of security we’re aiming for).

On the other hand, liquidity pool tokens that are GHO or AAVE pairs have strategic importance to the protocol. Incentivizing those should be the priority.

Incentivizing single assets other than Aave make sense especially wstETH of the auto compounding balance which will help increase the SM cover amount.

However, I agree about the limited incentives and it’s important to remember that we based the proposal to remain below the current budget. If the DAO was to consider that growing the budget can be beneficial since it would increase the cover & the liquidity on native assets, updated estimations can be provided. Note that GHO could also be considered in the single asset category.

On the estimation proposed, 25% of the current SM reward budget is allocated to single assets (275/1100) over which 200 are for StkAAVE & 75 for ETH or wstETH.
The remaining 75% could be used to incentivize pools including native assets using the vote incentives leverage when profitable.

@BarryLime

Was there any reasoning behind the specific 30%/45%/60% tiers described above and the assets assigned to each one? If so, it would be helpful to hear.

Sure, creating different slashing parameters for each category also creates risk tranches representing different potential earnings and increasing the total SM cover. Agree that we could consider reducing the slashing on single assets, but this would also impact the max cover, and current users seem comfortable with 30% so far.

The reasoning was to keep the single assets slashing unchanged since the design is very similar to the current one, except that several assets can be incentivized & that the stkAAVE APR would be lower (Currently around 3,7% with 200 AAVE/day vs 6,2% APR now with 550 AAVE/day)

For volatile BPT, the strategy is to aim for a range APR between 8% & 12% below a defined TVL threshold. Above that, the APR per asset in the SM might be lower depending on the Aave DAO strategic voting power capacity.

Considering that depositing in a volatile LP has more risks and would offer a better yield than single assets, the goal was to create an intermediary slashing category, with initial considerations between 50 to 60%, as we were aiming for a 75-80% slashing on the Stable BPTs. However, following several feedback, we reduced the volatile one to 45% and the Stable one to 60%.

For the Stable BPT, the strategy aims for a range APR between 18% and 22% APR below a defined TVL threshold. As for the volatile category, above that threshold, the APR per asset in the sm might be lower depending on the Aave DAO strategic voting power capacity.

Offering a sustainable 20% APR on stables while supporting GHO liquidity growth should attract an important amount of depositors which could be willing to take a higher risk of slashing since the position would be relatively safe. Considering that the APR would be above 20% most of the time, having a 60% slashing should be ok and will considerably contribute to increasing the SM cover value.

Note that we base our estimations on the current SM incentives budget value, however the DAO could definitely vote for a budget increase/decrease or add a complement using GHO profits once live.

@BarryLime

They’d never vote to slash the majority of their own holdings, so it makes some sense to offer a cap and make them more amenable to self-slashing for the benefit of the protocol.

It’s not the majority of their holding since it’s max 30%, and i’d say never say never here. It didn’t happen so far because the shortfall events were limited and small enough to be contained by the treasury without a significant impact, however, it doesn’t mean that it won’t happen and Aave holders might just not have a choice to save the protocol at some point.

@BarryLime

I think the max slashing for non-AAVE deposits would likely need some iteration, since the higher you set the cap, the less depositors you’ll have. This is offset by the fact that you’re potentially slashing a greater % of those fewer depositors (so overall safety dollars may still be higher). There is a point along that curve that would provide the maximum safety, and we’d need some experimentation to find it. That 45-60% range is somewhat arbitrary, but does feel right as a starting point.

Open to discuss changes for these parameters, and slashing can be a midterm solution but this solution is not sustainable long term in its current management because it requires to keep incentivizing depositors indefinitely.

As mentioned in Part VI, I strongly believe that the DAO should, at least partially, self insure over time, and could even use the POL positions to generate additional revenues and strategic voting power, but we’re not there yet.

@John_TV_Locke

Do you guys think the main concern here should be total yield for depositors or “spread” ie additional yield depositors can earn in exchange for the risk they are taking? The spread required to incentivize stakers is a function of liquidity prem + slashing risk, and slashing risk is equal for any asset while the liq prem itself is likely a function of price volatility. So in the context of choosing which assets to include, we think the ones that minimize this spread, as smaller spreads means more efficient spending by the DAO, while maximizing liquidity availability. But curious your thoughts on that framework.

Thanks for the feedback @John_TV_Locke !

As explained above, we based this strategy on several parameters, and estimated yield for depositors is one of them, as well as the spread between incentives spent by the DAO and emissions received for it. As for the assets selection we initially focused on the native assets liquidity growth and with a limited selection to easily implement it but one of the future considerations of part VI is to define a more detailed framework to support more assets.

This answer was co-written with @TokenLogic.

If no additional comments arise, the vote will be published on snapshot over the weekend, with voting to start on Monday 29th.