What should be the LTV/Liquidation Threshold level for Aave V2?

Simple Summary

Three distinct levels from which the community can select a preferred risk tolerance for Aave V2.

Abstract

From a market risk perspective, the goal for Gauntlet’s simulations is to standardize Value-at-Risk (VaR) across all assets. Matching risk tolerance to a normalized expected yield throughout Aave V2 ensures no subset of assets adds disproportionate risk to the Safety Module.

Following asset onboarding, empirical data on user behaviour (e.g., average health factors) and changes in market conditions (e.g., expected slippage) improve our simulation precision. Improved precision allows for higher confidence in model outputs—particulary for aggressive recommendations.

Gauging risk appetite is something Gauntlet will do quarterly to ensure our risk parameter recommendations track the preference of the Aave community.

Motivation

The existing risk framework has been instrumental in facilitating onboarding new assets. As expected and observed, liquidity risk, volatility risk, and market capitalization frequently change for all assets on Aave. Updating LTV and Liquidation thresholds to remain in lockstep with the market is key to improving the target metrics outlined in Gauntlet's Dynamic Risk Parameters proposal.

Specification

Current LTV/Liq_Threshold	Conservative LTV	Moderate LTV	Aggressive LTV	Conservative Liq_Threshold	Moderate Liq_Threshold	Aggressive Liq_Threshold
USDC (80%, 85%)	80	82.5	85	85	85	87.5
DAI (75%, 80%)	75	75	80	80	80	82.5
TUSD (75%, 80%)	75	80	80	80	82.5	82.5
WBTC (70%, 75%)	65	70	75	70	75	80
WETH (80%, 82.5%)	80	80	82.5	82.5	85	85
REN (55%, 60%)	45	55	55	55	60	65
BAT (70%, 75%)	70	70	75	75	75	80
YFI (40%, 55%)	45	45	55	60	60	65
DPI (60%, 70%)	55	60	60	65	70	75
LINK (70%, 75%)	65	70	70	70	75	80
BAL (55%, 60%)	55	65	70	65	70	75
MKR (60%, 65%)	60	65	70	65	70	70
ZRX (60%, 65%)	60	60	65	65	70	70
UNI (60%, 65%)	50	60	65	60	70	70
KNC (60%, 65%)	60	60	65	65	70	70
CRV (40%, 55%)	30	40	45	45	55	60
XSUSHI (25%, 45%)	30	35	45	50	60	60
ENJ (55%, 60%)	40	50	55	55	60	65
AAVE (50%, 65%)	55	60	65	70	70	75
SNX (15%, 40%)	15	20	25	40	45	55

Key Model Inputs & Notes

Asset	Volatility
USDC	0.014
DAI	0.017
TUSD	0.031
WBTC	0.72
WETH	0.994
REN	1.05
BAT	1.08
YFI	1.11
DPI	1.12
LINK	1.16
BAL	1.17
MKR	1.255
ZRX	1.311
UNI	1.331
KNC	1.357
CRV	1.4
XSUSHI	1.51
ENJ	1.612
AAVE	1.72
SNX	1.86

• WBTC: Downside slippage values for WBTC have become smaller. This means liquidators see less slippage on trades and more liquidity. Additionally, a tight liquidation buffer will suffice given the lower market volatility.
• YFI: Both slippage values and volatility have improved for YFI. The liquidation buffer shrinks between conservative and aggressive parameters due to marginal increase of liquidations observed during simulation. Doing so provides users an option to be more aggressive with starting positions should they choose.
• LINK: Given market liquidity and LINK supplier's borrow positions, the aggressive setting will only include an increase in liquidation threshold.
• xSUSHI: Recent liquidation analysis on empirical data, lacking previously, provides higher confidence that insolvency events can be mitigated.
• SNX: The major concern with for SNX is that there is very high volatility and high slippage. The aggressive setting requires a larger delta between LTV and liquidation threshold to compensate for the additional risk.

Asset	Slippage Intensity Sell	Slippage Power Sell
WBTC	-0.134	0.52
YFI	-1.003	1.008
LINK	-5.648	1.14
XSUSHI	-0.864	1.049
SNX	-17.007	1.477

Next Steps

• AIP creation the first weekday following the completion of a successful Snapshot vote. The current target is 2021-09-07.