Freezing UST and Updating stETH Parameters

Simple Summary

Gauntlet proposes freezing UST on Aave v2, increasing liquidation threshold on stETH, and decreasing loan-to-value (LTV) on stETH.

Abstract

Due to market conditions around UST and related oracle unreliability, Gauntlet proposes freezing UST.

Due to current uncertainty around the stETH peg, Gauntlet proposes increasing stETH liquidation threshold to 81% and decreasing stETH LTV to 69%. Currently, stETH liquidation threshold is 75% and stETH LTV is 73%.

Specification

Due to uncertainty around the stETH peg, Gauntlet proposes increasing stETH liquidation threshold. This will allow borrowers using stETH as collateral with more buffer in case stETH continues to depeg, and thus decrease the chances of liquidation cascades that lead to insolvency on the Aave platform. stETH LTV will also be decreased, so new positions will not be able to take on riskier positions using stETH as collateral. Our analysis indicates that an 81% liquidation threshold for stETH should allow for the protocol to withstand an additional 10% depeg from stETH and ETH price. Gauntlet's simulations of the Aave protocol indicated that a decrease in LTV to between 66-69% and an increase in liquidation threshold to 81-82% could significantly decrease liquidation volume as well as total insolvencies while minimally decreasing capital efficiency.

Our simulations also considered larger increases in stETH's liquidation threshold, but these changes had a diminishing impact on liquidation and insolvency decreases in our models. Drastic changes to liquidation threshold can also lead to a negative user experience should protocol parameters be reversed to a more optimal state after the market returns to normal. However, a decrease in LTV only impacts a user's ability to borrow more assets and not deposit or repay debts, and thus won't affect user experience as heavily.

Implementation

The proposal sets the 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.