[ARFC] Chaos Labs Risk Parameter Updates - Aave V2 Ethereum - 2023.08.09

Simple Summary

A proposal to:

(1) Reduce the Liquidation Threshold (LT) and Loan-To-Value (LTV) for sixteen (16) frozen collateral assets on Aave V2 Ethereum.

(2) Increase Reserve Factors for all collateral assets on Aave V2 Ethereum.

Motivation

In line with our ongoing commitment to reducing the potential risks associated with V2 markets and promoting migration to V3, we suggest a phased wind-down of the frozen V2 markets. The following proposal is part of a series of proposals to reduce capital efficiency across V2 collateral assets.

The previous iteration of proposals:

• [ARFC] Chaos Labs Risk Parameter Updates - Aave V2 Ethereum - 2023.6.23
• [ARFC] Chaos Labs - Incremental Reserve Factor Updates - Aave V2 Ethereum

LT Reductions

Implementing a gradual decrease in LTs effectively diminishes the borrowing power for the existing markets. This proposal offers the community two alternatives - a "moderate" and an "aggressive" approach for the preliminary LT reduction.

• Aggressive (Chaos Recommendation) - This option suggests an LT configuration that optimizes reductions without significantly increasing the number of accounts eligible for liquidation. The proposed values are set at a margin of 8% from the closest LT figure, which would trigger more substantial liquidations.
• Moderate - If the community leans towards a more tempered approach of slowly reducing the Liquidation Thresholds, we propose limiting the LT decrease to a maximum of 10%. Hence, we define the “Moderate” option as the minimum between 10% and the value suggested by the aggressive approach.

• “Aggressive”

Asset	Current LT	Rec LT	Value Liquidated ($)	Accounts Liquidated
BAL	55%	35%	1,580	5
BAT	52%	38%	750	3
CVX	40%	34%	250	3
DPI	42%	22%	80	2
ENJ	60%	54%	500	4
MANA	62%	54%	1,500	4
REN	40%	32%	1,160	3
xSUSHI	60%	53%	0	0
YFI	55%	52%	0	0
ZRX	45%	39%	0	0
LINK	83%	78%	2,440	10
1INCH	50%	40%	56	1
UNI	77%	57%	500	9
SNX	59%	39%	650	10
MKR	64%	44%	140	5
ENS	57%	50%	45	2

• “Moderate”

Asset	Current LT	Rec LT	Value Liquidated ($)	Accounts Liquidated
BAL	55%	45%	1,120	3
BAT	52%	42%	80	2
CVX	40%	34%	250	3
DPI	42%	32%	0	0
ENJ	60%	54%	500	4
MANA	62%	54%	1,500	4
REN	40%	32%	1,160	3
xSUSHI	60%	53%	0	0
YFI	55%	52%	0	0
ZRX	45%	39%	0	0
LINK	83%	78%	2,440	10
1INCH	50%	40%	56	1
UNI	77%	67%	290	6
SNX	59%	49%	85	3
MKR	64%	54%	16	2
ENS	57%	50%	45	2

In the tables below, we share data to quantify the effect of the recommended reductions on protocol users:

	Value liquidated	Accounts liquidated
Aggressive	$10,100	58
Moderate	$8,580	43

As Liquidation Threshold reductions may lead to user accounts being eligible for liquidations upon their approval, we want to clarify the full implications to the community at each step. Chaos Labs will publicly communicate the planned amendments and list of affected accounts leading to the on-chain execution.

LTV Decrease

For assets where the LTV is not 0, we recommend maintaining the same buffer as the current configuration.

RF Increase

In line with our V2 to V3 migration plan, we propose another iteration of RF increases on Aave V2 Ethereum. By progressively increasing the reserve factors, the interest rate for supplying these assets on V2 will be increasingly less attractive, thus encouraging suppliers to transition positions to V3. In this proposal, we suggest an increase of 5% for all V2 collateral assets.

Specification

Frozen Assets:

Asset	Cur LT	Rec LT*	Current LTV	Rec LTV*	Current RF	Rec RF
BAL	55%	35% / 45%	0	0	30%	35%
BAT	52%	38% / 42%	0	0	30%	35%
CVX	40%	34%	0	0	30%	35%
DPI	42%	22% / 32%	0	0	30%	35%
ENJ	60%	54%	0	0	30%	35%
MANA	62%	54%	0	0	45%	50%
REN	40%	32%	0	0	30%	35%
xSUSHI	60%	53%	0	0	45%	50%
YFI	55%	52%	0	0	30%	35%
ZRX	45%	39%	0	0	30%	35%
LINK	83%	78%	70%	65%	25%	30%
1INCH	50%	40%	40%	30%	25%	30%
UNI	77%	57% / 67%	65%	45% / 55%	25%	30%
SNX	59%	39% / 49%	46%	26% / 36%	40%	45%
MKR	64%	44% / 55%	59%	39% / 49%	25%	30%
ENS	57%	50%	47%	40%	25%	30%

• Recommended LT and LTV values will be finalized after the Snapshot between the aggressive and moderate options.

Unfrozen Assets

Asset	Current RF	Recommended RF
DAI	15%	No Change - will be addressed in a separate proposal
FRAX	25%	30%
GUSD	15%	20%
LUSD	15%	20%
sUSD	25%	30%
TUSD	25%	30%
USDC	15%	20%
USDP	15%	20%
USDT	15%	20%
CRV	25%	30%
WBTC	25%	30%
ETH	20%	25%

Next Steps

1. Following community feedback, submit the ARFC for a snapshot vote for final approval.
2. 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