Risk Parameter Updates for Aave v2 Ethereum - LT and LTV (DAI, USDC)
01Summary
Proposal to reduce Liquidation Threshold (LT) and Loan-To-Value (LTV) risk parameters for USDC and DAI on Aave V2 Ethereum. Changes aim to decrease capital efficiency, mitigate attack vectors, and encourage user migration to V3. Reductions follow the Risk-Off Framework with incremental decreases of up to 3% per proposal, with 7-day advance community notice before execution.
- Type
- parameter change
Key changes
- Reduce Liquidation Threshold (LT) for USDC and DAI to decrease capital efficiency and increase capital requirements for price manipulation attacks(high)
- Reduce Loan-To-Value (LTV) for USDC and DAI as part of risk mitigation(high)
- Implement changes incrementally following Risk-Off Framework with up to 3% reduction per proposal(medium)
- Provide 7-day advance notice via Twitter, forums, Nansen Connect, and Blockscan Chat before on-chain execution(medium)
Notable concerns
- Liquidation Threshold reductions may trigger liquidations for existing user accounts, with some sizable positions requiring community discussion
- Changes prioritize security and risk mitigation over capital efficiency optimization
Generated by Kvorum
02Description
Simple Summary
A proposal to adjust 4 total risk parameters, including Liquidation Threshold (LT) and Loan-To-Value (LTV), for USDC and DAI markets on Aave V2 Ethereum.
Abstract
Following recent market events, the AAVE community has decided to reduce the risk profile across many higher volatile assets by disabling borrow or freezing across v2 markets (AIP-121, AIP-124, and AIP-125)
After mitigating the immediate risk to the protocol with the above AIPs, Chaos Labs is exploring the impact and trade-offs of decreasing the Liquidation Thresholds and LTVs of USDC and DAI. Reducing capital efficiency on v2 assets will mitigate attack vectors while also serving as effective motivation to shift usage to v3, where users can enjoy the benefits of E-mode with enhanced risk techniques and mitigation methodologies.
As Liquidation Threshold reductions may lead to user accounts being eligible for liquidations upon their approval, we want to make the full implications clear to the community at each step. To best minimize this impact, we suggest reaching the desired settings by a series of incremental decreases, following the Risk-Off Framework previously approved by the community, with a reduction of up to 3% in any given AIP. In an attempt to avoid liquidations, Chaos Labs will communicate the planned amendments 7 days before their on-chain execution via all available avenues (Twitter, forums, Nansen Connect, and Blockscan Chat).
Motivation
The priority of this proposal is not to optimize markets (capital efficiency); but rather to focus on the security and risk mitigation of the protocol. It will be followed up with additional proposals to update risk parameters to reflect the current market conditions accurately.
The goal of this ARC is two-fold:
- Reduce LTs → Reducing liquidation thresholds for USDC and DAI effectively reduces capital efficiency and increases the required capital for waging price manipulation attacks on Aave.
- Encourage user migrations to v3 → This also begins to pave the way towards migrating to v3, where these assets can be utilized in E-mode.
However, this is a significant change, and we wanted to present data to quantify and visualize the effect of such reductions on protocol users for community discussion. Specifically, we want to surface data around the liquidations this would trigger, as some are sizable and warrant a discussion of how these should be handled and if this is the most appropriate action forward.
The respective data can be found in the governance forum discussion linked below:
Specification
The following risk parameter proposal is presented below:
*Data from Mainnet snapshot captured on December 15th, 2022, 14:30 GMT
Implementation
Payload implemendations can be found below:
Proposal payloads can be found below:
Copyright
Copyright and related rights waived via CC0.
03Mismatch analysis
The proposal describes a two-step action: executing a USDC risk-parameter payload and a DAI risk-parameter payload, and it explicitly links both payload contract addresses in the Implementation section. The decoded on-chain actions are exactly two execute() (fallback) calls to those same two addresses, in the same order (USDC then DAI), with zero ETH value, which is the standard pattern for Aave governance payload execution. Target addresses match exactly what is quoted in the description, so there is no target_mismatch. However, the actual parameter changes (specific LT/LTV percentage reductions per asset) are encoded inside the payload contracts' bytecode and are not exposed by the decoded calldata itself (only a generic execute() selector is decoded), so it is not possible from the given data to independently verify that the on-chain percentage changes match the 'up to 3%' framework claim or the values implied by the referenced charts. This is a common and expected limitation for delegatecall-based governance payloads and does not itself constitute a discrepancy, but it does lower confidence in fully verifying the numeric claims. Given the addresses match precisely and no contradictory or omitted top-level actions are apparent, the proposal is assessed as consistent, with medium confidence due to the inability to inspect the payload's internal parameter-setting logic from the decoded data alone.
Generated by Kvorum
04Actions
- Target
- 0xeca5…765c
- Value
- 0 wei
- Function
- fallback()
- Arguments
{}- Calldata
- Target
- 0x60bc…4fb5
- Value
- 0 wei
- Function
- fallback()
- Arguments
{}- Calldata
05Tally
Summed from votes
06Voters
No votes recorded yet.
07Forum
- [ARC] - Risk Parameter Updates for Aave v2 Ethereum - LT and LTV (2022.12.01) ↗discourse · high confidence
Arguments for
- Reducing liquidation thresholds and LTV for USDC and DAI will mitigate attack vectors and reduce the cost of price manipulation attacks on the protocol.— ChaosLabs
- Parameter reductions will encourage user migration from v2 to v3, where users can benefit from E-mode and enhanced risk mitigation techniques.— ChaosLabs
- The proposed incremental approach following the Risk-Off Framework with up to 3% reductions in any given AIP minimizes negative user experience while achieving risk mitigation goals.— ChaosLabs, sakulstra
- A more sensitive approach with smaller step reductions (150 bps instead of 300 bps for USDC) allows users time to rebalance and results in fewer overall liquidations.— sakulstra
Arguments against
- Forcing liquidation of 168 users (approximately 10x the total force liquidations in protocol history) may be excessive without demonstrating large enough gains in reduced protocol risk.— jmo
- The proposal lacks quantitative analysis of how much it actually reduces the cost of price manipulation attacks, which may only have single-digit percentage effects insufficient to deter attackers.— jmo
- The link between recent market events (like CRV insolvency) and the need for these specific parameter changes is unclear, as CRV was not clearly a price manipulation attack.— jmo
- It would be more prudent to wait until v3 launches on mainnet before reducing v2 parameters if migration is a primary goal, rather than force liquidations now.— jmo
- The proposal does not address ETH, which could be used for the same price manipulation attacks if the stated goal is to reduce attack vectors across assets.— jmo
Unresolved concerns
- What is the quantified Value-at-Risk (VaR) impact of these parameter reductions to justify liquidating 168 users, the largest forced liquidation event in protocol history?— jmo
- How much will these parameter changes actually reduce the profitability and capital efficiency of price manipulation attacks, and is the reduction substantial enough to deter attackers?— jmo
- Why are ETH and other volatile assets not included in these risk parameter reductions if the primary goal is to mitigate price manipulation attack vectors?— jmo
Notable participants
- ChaosLabsProposal author and risk manager providing data analysis, recommendations, and ongoing updates on at-risk accounts throughout the governance process.
- sakulstraEarly commenter generally supportive but advocating for more incremental reductions (150 bps steps) to minimize liquidations and give users time to rebalance.
- jmoSkeptical questioner raising substantive concerns about VaR impact, quantification of attack vector mitigation, and the timing relative to v3 launch.
Generated by Kvorum
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