Aave

Simple Summary

A proposal to adjust fourteen (14) total risk parameters, including Loan-to-Value, Liquidation Threshold, and Liquidation Bonus, across six (6) Aave V3 Ethereum assets.

Motivation

Chaos Labs’ Parameter Recommendation Platform runs hundreds of thousands of agent-based off-chain and on-chain simulations to examine how different Aave V3 risk parameters configurations would behave under adverse market conditions - and find the optimal values to maximize protocol borrow usage while minimizing losses from liquidations and bad debt.

Note: As a general guideline, we limit the proposed changes by ±3% for all parameters as a high/low bound for a given proposal. This ensures more controlled changes and allows us to analyze their effect on user behavior before recommending further amendments to the parameters if the optimal configuration is outside this range.

Please find more information on the parameter recommendation methodology here.

You can also view the simulation results and breakdown for the different assets by clicking on them on this page.

The output of our simulations reveals an opportunity to increase LTVs and LTs for WBTC, WETH, WSTETH, LINK, DAI and USDC on V3 Ethereum, resulting in improved capital efficiency of the system, with a negligible effect on the projected VaR (95th percentile of the protocol losses that will be accrued due to bad debt from under-collateralized accounts over 24 hours) and EVaR (Extreme VaR, the 99th percentile of the protocol losses that will be accrued due to bad debt from under-collateralized accounts over 24 hours)

Simulating all changes jointly yields a projected borrow increase of ~$3.6M, with a negligible increase in VaR and Extreme VaR compared to simulations with the current parameters.

Liquidity Analysis:

Based on our analysis, we have determined that there is adequate on-chain liquidity to support any significant liquidations with the updated parameters.

Positions Analysis

We have not identified any outsized positions that are actively affecting our recommendations. The charts below illustrate the top borrowing accounts, excluding E-Mode.

Recommendations

Asset	Parameter	Current	Recommended	Change
WETH	Liquidation Threshold	82.5%	83%	+0.5%
WETH	Loan-to-Value	80%	80.5%	+0.5%
WBTC	Liquidation Threshold	75%	78%	+3%
WBTC	Loan-to-Value	70%	73%	+3%
WBTC	Liquidation Penalty	6.25%	5%	-1.25%
DAI	Liquidation Threshold	77%	80%	+3%
DAI	Loan-to-Value	64%	67%	+3%
USDC	Liquidation Threshold	76%	79%	+3%
USDC	Loan-to-Value	74%	77%	+3%
LINK	Liquidation Threshold	65%	68%	+3%
LINK	Loan-to-Value	50%	53%	+3%
LINK	Liquidation Penalty	7.5%	7%	-0.5%
WSTETH	Liquidation Threshold	79.5%	80%	+0.5%
WSTETH	Loan-to-Value	68.5%	69%	+0.5%