[AAVE] Chaos Labs x Aave DAO — Early Renewal Proposal

Simple Summary

Motivation

[quote="ChaosLabs, post:1, topic:22346"] Chaos Labs proposes a 12-month early renewal of our risk management partnership with the Aave DAO, starting July 13, 2025. This renewal will be a new and separate engagement stream, operating in parallel with the current engagement, which remains active through November 12, 2025. The early renewal will not affect the existing engagement and will continue independently through July 12, 2026.

This proposal reflects both the expanded scope of work already delivered—including support for new asset classes, implementation of systemic risk mechanisms, and over 1,100 risk parameter updates—and Chaos Labs’ continued commitment to building critical components of Aave’s risk infrastructure.

Our top priority for the upcoming term is the deployment and scaling of the Edge Risk Oracle, which currently secures over $5B in deposits and dynamically manages supply caps, borrow caps, interest rate curves, and PT parameters. Significant functional expansions are underway to further automate and strengthen the protocol’s risk systems.

We are seeking DAO alignment on this strategic direction and resource allocation to ensure the sustained delivery, scalability, and decentralization of Aave’s risk management infrastructure.

Background & Context

Chaos Labs was appointed by the Aave DAO in November 2022 as its dedicated risk partner and is currently operating under a 12-month engagement that began in November 2024. Since the start of this current term, Aave has experienced substantial growth—doubling its TVL from $12B to $24B and generating over $71.5M in protocol revenue. This rapid expansion has been accompanied by a surge in protocol complexity across assets, deployments, and mechanisms.

Over this same period, Aave has integrated or prepared for several major system upgrades: onboarding of Principal Tokens (PTs); deployment of mechanisms such as Smart Value Recapture (SVR); and the upcoming launch of Umbrella, Aave’s insolvency protection layer.

To meet these evolving needs, Chaos Labs has transitioned from periodic risk reviews to delivering deeply integrated, protocol-native risk automation infrastructure. At the core of this system is our Edge Risk Oracle architecture, which powers automated, governance-bounded updates to supply and borrow caps, interest rate curves, and Principal Token collateral parameters—actively securing over $5B in deposits across Aave markets. In parallel, we’ve expanded our real-time monitoring infrastructure, executed over 1,100 parameter updates via the Risk Stewards, and published targeted research on high-impact risk domains such as Ethereum validator staking penalties, Ethena-related risks, and SVR recapture dynamics.

As Aave prepares to onboard 10+ additional deployments and expand its asset coverage further, the protocol’s resilience and capital efficiency will depend on the continued development of a modular, data-driven risk layer. This renewal enables Chaos Labs to maintain and scale that infrastructure in lockstep with Aave’s accelerating trajectory.

Enhanced Scope and Value Delivery Highlights

Despite renewing at flat commercials of $2M in November, Chaos Labs has significantly expanded its work’s scope, volume, and impact compared to the prior year, delivering substantially more value without a budget increase.

Over the past six months of the current engagement, Chaos Labs has provided both tactical execution and strategic risk support, surpassing last year’s outputs across all key metrics:

• 64 asset listing analyses completed in the past 7 months (vs. 46 in the entire previous year), reflecting a sharp increase in volume and diligence scope.
• 13 new deployment listings, with 10 scheduled to go live shortly, significantly expanding protocol reach and impact.
• 226 supply cap, 203 borrow cap, and 572 interest rate curve updates executed through the Risk Stewards, scaling operational coverage.
• 260 total forum posts spanning proposal authorship, parameter reviews, research, and real-time risk insights, reinforcing Chaos Labs’ governance leadership.

The quality and depth of asset listings have significantly evolved, centered on the fundamental characteristics of each asset and its interaction with Aave’s core mechanisms. Listings incorporate understanding how the asset functions within its native protocol, aligning risk parameters with issuer-specific designs such as redemption logic, staking mechanics, or rebase behavior at a technical level. These are paired with simulation-backed stress testing, modeling systemic interactions, market shocks, and protocol-specific failure modes to ensure resilient integration.

For contrast:

• Earlier listing: oSETH onboarding
• Current standard: USR onboarding

Edge Risk Oracle Infrastructure

Chaos Labs has not only deployed a suite of Risk Oracles across the protocol—we have also designed the quantitative methodologies, triggers, and governance guardrails that underpin them. We are the only team in the industry offering end-to-end oracle-driven risk automation, combining bespoke modeling, real-time data integrations, and protocol-native controls.

• WETH Interest Rate Curve Oracle on the Prime Instance automatically adjusts Slope1 based on Lido staking rewards and the wstETH supply rate to preserve the profitability of looping strategies and optimize protocol revenues, accounting for $548M in deposits.↳ [ARFC]. Aave Generalized Risk Stewards (AGRS) activation - #3 by ChaosLabs
• Supply & Borrow Cap Oracles deployed across major V3 deployments (Avalanche, Arbitrum, Base), providing automated risk and utilization-aware cap adjustments for over $3.4B in total deposits.↳ [ARFC] Supply and Borrow Cap Risk Oracle Activation
• Principal Token (PT) Risk Oracle for Pendle and similar assets—featuring quantitative parameterization and automated kill switch logic—now supporting over $1B in integrated PT assets.↳ ARFC: PT Risk Oracle
• Stablecoin Interest Rate Curve Risk Oracle, approved via Snapshot, enabling dynamic interest rate optimization for stablecoin markets with improved efficiency.↳ ARFC: Curve Oracle

Monitoring & Analytics

• Monitoring infrastructure has been significantly expanded, now tracking advanced metrics such as asset collateral distribution over time, user LTV at liquidation, and market liquidity concentration. Over the past six months, support has been extended to 5 additional deployments, bringing the total to 16, with imminent support for upcoming deployments underway. ↳ Aave Risk Monitoring and Alerting Platform
• SVR Monitoring Platform, launched to monitor SVR metrics and liquidation outcomes at a granular level, alongside SVR oracle performance.↳ SVR Dashboard

Key Research Pieces

• Ethereum staking risk modeling, quantifying validator slashing impacts on LST/LRT performance and collateralization viability.↳ Research Post
• Ethena-related risk simulations, including funding volatility, depeg risk, and potential contagion scenarios.↳ Simulation Post
• SVR analysis, evaluating integration feasibility, revenue potential, and liquidation delay risks through detailed oracle delay and bad debt modeling.↳ SVR Analysis

Market Events

• Chaos Labs Risk Reports during market events such as 02/03/25 and 04/07/25, providing real-time analysis of liquidation volume, user behavior, and Aave protocol performance under heightened volatility.
• Chaos Labs post-mortem on the Bybit security event, highlighting how CEX-driven price dislocations impacted oracle feeds and outstanding risks in the context of USDe and Ethena, and underscoring the need for more resilient on-chain pricing mechanisms.↳ [Post-Mortem](https://governance.aave.com/t/chaos-labs-update-on-bybit

... please visit link below to view full proposal

https://app.aave.com/governance/v3/proposal/?proposalId=335