Freeze stETH, Increase stETH Liq. Threshold to 90%, Pause ETH Borrowing

Simple Summary

Mitigate risk to Aave v2 markets relating to the price deviation of stETH/ETH.

Abstract

Forum Discussion

stETH has emerged over recent months as one of the most popular collateral types on AAVE. Many users have deposited stETH and borrowed ETH against it. This means that if those prices diverge or the asset “depegs”, there could be a lot of liquidations in AAVE. There has been much speculation on the risks posed by a stETH/ETH price depeg on the protocol. This proposal follows up on our last post to provide further risk mitigation actions.

Starting June 10, Gauntlet observed a large spike in AAVE VaR due to volatility in stETH price and immediately investigated it further. The following steps mitigate the chance of a liquidation spiral negatively impacting AAVE tokenholders and users.

1. Freeze the stETH market

This will prevent new positions from being opened. This will temporarily pause the stETH market except for people winding down their positions. This is essential as it allows us to take the next step, increasing the liquidation threshold (LT) for ETH. If we don’t pause the market, users could increase the risk by opening new positions that take advantage of the increased LT.

2. Increase LT for stETH to 90%

This will give existing positions more breathing room with regards to stETH/ETH price deviation (you can the see effect of this in the heatmaps above) and will make the protocol much more resilient to a further depeg.

3. Pause ETH borrowing

If LT is changed, then preventing existing positions from increasing their risk exposure is required. To do this, you would need to prevent new ETH borrows from being opened. Almost all ETH borrowing is recursive borrowing and so while there is limited demand for ETH borrow, it’s still something users want.

Implementation

The proposal implements its changes by calling configureReserveAsCollateral, freezeReserve, and disableBorrowingOnReserve on the LendingPoolConfigurator contract at 0x311Bb771e4F8952E6Da169b425E7e92d6Ac45756, using the address and parameters specific to each token and each parameter update.

Copyright

Copyright and related rights waived via CC0.

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