Risk Parameter Updates for Aave V2 and Aave Arc (Fireblocks) 2022-05-26

Simple Summary

A proposal to adjust nine (9) total risk parameters, including LTV, Liquidation Threshold, and Liquidation Bonus across three (3) Aave V2 assets.

In addition, this AIP proposes adjusting two (2) total risk parameters, including LTV and Liquidation Threshold, across one (1) Aave Arc (Fireblocks) asset.

Abstract

This proposal is a batch update of risk parameters to align with the Moderate risk level chosen by the Aave community. These parameter updates are a continuation of Gauntlet’s regular parameter recommendations. Following the recent market crash, our simulation engine has ingested the latest market data (outlined below) to recalibrate parameters for the Aave protocol. Please note that this set of parameter changes will be lowering liquidation threshold for LINK and WETH.

These parameter updates also represent Gauntlet's first set of parameter updates for the Aave Arc market.

Motivation

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

Gauntlet's parameter recommendations are driven by an optimization function that balances 3 core metrics: insolvencies, liquidations, and borrow usage. Parameter recommendations seek to optimize for this objective function. Our agent-based simulations use a wide array of varied input data that changes on a daily basis (including but not limited to asset volatility, asset correlation, asset collateral usage, DEX / CEX liquidity, trading volume, expected market impact of trades, and liquidator behavior). Gauntlet's simulations tease out complex relationships between these inputs that cannot be simply expressed as heuristics. The individual collateral pages on the Gauntlet Risk Dashboard cover other key statistics and outputs from our simulations that can help with understanding interesting inputs and results related to our simulations.

Aave V2 Parameter Changes Specification

Our recent market downturn report showed that many collaterals are resilient to insolvencies, as our simulation models have predicted. Gauntlet's simulation engine will continue to adjust risk parameters to drive increases in capital efficiency while maintaining protocol risk at safe levels.

Aave Arc (Fireblocks) Parameter Changes Specification

Our simulation platform indicates that increasing the capital efficiency of USDC collateral does not meaningfully increase the risk of insolvencies. Note that, on our dashboard, the Value at Risk (VaR) metric for Aave Arc is currently $0. This low risk of insolvencies is reflective of the fact that the majority of borrowing on the platform is collateralized by the same asset as the assets being borrowed. As lending market usage grows, our platform will continue to ingest up-to-date data, re-run risk simulations, and make future parameter change recommendations.

Risk Dashboard

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

Aave V2 Dashboard

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.

<sup>By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.<sup>