Summary

Reduce stablecoin LTs and LTVs across all markets.

Motivation

In response to the volatility risks highlighted by the UNI incident on Compound, this proposal aims to mitigate theoretical debt asset volatility by proposing a reduction in collateral asset borrowing power for stablecoins. While the UNI debacle was attributed to inadequate dual-bounded fallback oracle logic, a property not employed by Aave, leading to mispriced UNI debt and subsequent arbitrage activities, the observed upward volatility in longer-tailed assets suggests a prevailing "risk-on" market sentiment. Therefore, we advocate for minimizing borrowing power concerning shorting these assets to prevent potential short squeezes and liquidation shortfalls. Subsequent recommendations will address borrow cap reductions for relevant long-tailed assets, which generate minimal revenue relative to the theoretical risks, especially in edge-case scenarios.

We will implement some of the recommendations in two increments to mitigate the impact on users and allow them to adjust their positions. The current total value liquidated following the first step of reductions is ~$24K.

Recommendations

Assets	LT	LTV	Total Liquidated
USDC, USDT, DAI	80% → 79%	77% → 76%	$18k
USDC.e, USDbC	80% → 79%	77% → 76%	$1.8k
USDC (Avalanche)	86.25% → 85%	82% → 80%	$2.3k
USDT (Avalanche)	80% → 78%	77% → 75%	0
DAI (Avalanche)	82% → 80%	75%	27
FRAX (Avalanche)	80% → 78%	75%	0
LUSD, sDAI, xDAI	80% → 79%	77% → 76%	0
USDC.e (Optimism)	85% → 84%	80% → 78%	9
DAI (Optimism)	83% → 80%	78% → 75%	$13

Next Steps

If consensus is reached, submit an Aave Improvement Proposal (AIP) to implement the proposed updates.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this ARFC.

Copyright

Copyright and related rights waived via CC0