Risk Parameter Updates 2021-12-16

Simple Summary

A proposal to adjust nine (9) total risk parameters across seven (7) Aave V2 assets including LTV, Liquidation Threshold, and Liquidation Bonus. In addition, we propose freezing the KNCL reserve.

Abstract

This proposal is a batch update of risk parameters to align with the the Moderate risk level chosen by the Aave community. These parameter updates are a continuation of Gauntlet's regular parameter recommendations.

Motivation

This set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets.

Specification

The recent market downturn on the weekend of December 4th led to the most liquidations on both centralized exchanges and in liquidity protocols in the recent past. Most liquidations on the Aave protocol happened between 4:30 and 5:45 UTC when the price of ETH dropped nearly 13%. Below is a graph of liquidation by collateral and repay asset. Although volatility for assets is slightly higher, the abundance of liquidity and active market participants is a positive sign for the health of Aave! For example, the total value of CRV (curve dao token) liquidated was large compared to the total collateral used on Aave. Lower LTV, lower liquidation threshold, and higher liquidation bonus protect the protocol from insolvencies. However, multiple liquidations of over 400,000 USD occured in quick succession. This shows ample liquidity for liquidators even in times of high network congestion. These market events provide important data points for measuring tail risk.

For reference, previous analysis of liquidations on Aave from May 2021 can be found here: https://medium.com/gauntlet-networks/aave-protocol-liquidation-retrospective-may-2021-67c655fc1b31

Although some assets currently have higher volatility, our analysis shows that it is safe to increase borrowing parameters and decrease liquidation bonus values. Our simulations study price drops and network congestion more extreme than was seen last week, and slippage and liquidity considerations have improved.

Parameter	Current Value	Recommended Value
BAT Loan To Value	70%	75%
CRV Liquidation Bonus	10.0%	8.5%
ENJ Liquidation Bonus	10.0%	7.5%
REN Loan To Value	55%	60%
REN Liquidation Threshold	60%	65%
SNX Loan To Value	30%	40%
SNX Liquidation Threshold	55%	60%
SUSHI Liquidation Bonus	10.0%	8.5%
ZRX Loan To Value	60%	65%

Freezing KNCL The KyberDAO approved the proposal to migrate KNC token contract to a new implementation on 4/20, which enables Kyber governance to upgrade KNC efficiently. As of 11/2, 177M of KNC have migrated to the new Kyber Network Crystal (KNC) and 74M of KNC are still in the old KNC Legacy (KNCL) contract. There is currently 916K KNCL supply and 229k total borrowed on Aave.

Considering that exchanges (e.g. Kraken, Crypto.com) have stopped supporting KNCL deposit and trading, the liquidity of KNCL has also been reduced. We propose freezing KNCL to speed up the KNC migration as well as eliminating the risk of keeping a less liquid deprecated asset on the platform.

Risk Dashboard

The community should use Gauntlet's Risk Dashboard to better understand the updated parameter suggestions and general market risk in Aave V2.

Implementation

The proposal sets the liquidation bonus, LTV and liquidation threshold ratios by calling configureReserveAsCollateral on the LendingPoolConfigurator contract at 0x311Bb771e4F8952E6Da169b425E7e92d6Ac45756, using the address and parameters specific to each token.

The full list of parameter updates can be found in the forum.

Copyright

Copyright and related rights waived via CC0.