[ARFC] Supply and Borrow Cap Risk Oracle Constraint Specification

Author: Chaos Labs

Date: 2025-05-15

Summary

The deployment of Supply and Borrow Cap Risk Oracles across Avalanche, Base, and Arbitrum has proven to be highly robust and operationally efficient, collectively underwriting over $3.5 billion in total deposits and performing 140 collective updates since its launch a few months ago. This successful rollout has affirmed the framework’s ability to manage cap adjustments dynamically while strictly adhering to defined constraints. As the system scales across more markets, it becomes increasingly important to establish clear, standardized criteria for where automation is appropriate, ensuring continued protocol safety, effective governance, and consistent application of risk controls.

This addendum outlines a refined framework to standardize which asset types are eligible for automated cap adjustments under the Risk Oracle system. While the core automation mechanism is designed to enhance the scalability, efficiency, and responsiveness of cap management across Aave markets, not all assets exhibit risk profiles or maturity levels that make them suitable for autonomous updates.

To that end, this proposal introduces specific exclusion criteria that ensure automation is applied conservatively and only where appropriate. These constraints are rooted in protocol maturity, liquidity stability, and usage characteristics, and they are designed to maintain a prudent balance between automation and manual oversight.

The newly defined constraints are as follows:

1. Asset Inception Window (Minimum 30-Day Maturity Requirement)

Assets that have been listed on Aave for fewer than 30 days are excluded from the Risk Oracle’s automation logic.

• Rationale: Newly listed assets typically experience volatile and unrepresentative usage patterns that may not reflect long-term user behavior. A 30-day buffer ensures that demand signals within the protocol are more stable and better suited for risk-adjusted modeling.
• Operational Impact: These markets require manual cap assessments to accommodate early-stage adjustments. This manual pathway allows for more flexible increases beyond the conservative limits enforced by the Risk Oracle.

2. E-Mode-Only Collateral Excluded

Assets that are only enabled for use as collateral within E-Mode, and not allowed as general collateral outside of E-Mode, are exempt from automated cap increases.

• Rationale: These assets typically serve single-purpose use cases with limited composability, often in growth-oriented or speculative scenarios. As such, they exhibit non-diversified, concentrated behavior with elevated systemic correlation risks.
• Risk Management Principle: Restricting Risk Oracle automation ensures greater human oversight over assets that may be tightly bound to a single borrowing corridor or incentive mechanism.

3. Minimum Market Size Threshold for Cap Changes

The Risk Oracle framework excludes markets with a nominal cap size below $5 million from any automated cap changes, both increases and decreases.

• Rationale: Smaller markets exhibit higher sensitivity to usage fluctuations, fragmented liquidity conditions, and early-stage volatility. Moreover, the Risk Oracle’s automation is deliberately constrained to a conservative +30% maximum adjustment, in contrast to the +100% allowed under manual Risk Steward intervention. For smaller markets, this tighter adjustment range may not provide sufficient flexibility to accommodate growth dynamics or respond to sharp risk changes.
• Application: In markets under the $5M threshold, both cap increases and decreases are managed manually, ensuring higher-touch, context-aware governance and risk evaluation until the market matures.

Disclaimer

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

Copyright

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