{"aip":53,"title":"Risk Parameter Updates 2021-12-16","status":"Proposed","author":"Paul Lei, Jonathan Reem, Nick Cannon, Watson Fu","shortDescription":"Risk parameter updates","discussions":"https://governance.aave.com/t/arc-risk-parameter-updates-2021-12-16/6646","created":"2021-12-20T00:00:00.000Z","preview":"## Simple Summary\n\nA proposal to adjust nine (9) total risk parameters across seven …","basename":"AIP-53","description":"## Simple Summary\n\nA proposal to adjust nine (9) total risk parameters across seven (7) Aave V2 assets including LTV, Liquidation Threshold, and Liquidation Bonus. In addition, we propose freezing the KNCL reserve.\n\n\n## Abstract\nThis proposal is a batch update of risk parameters to align with the the [Moderate risk level](https://snapshot.org/#/aave.eth/proposal/QmT9T4Rfnh1Z2HYmMPXvtFotMK2vSxiXK8dKStg2b6n4gi) chosen by the Aave community. These parameter updates are a continuation of Gauntlet's regular parameter recommendations.\n\n\n## Motivation\n\n\nThis set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets.\n\n\n## Specification\n\nThe recent market downturn on the weekend of December 4th led to the most liquidations on both centralized exchanges and in liquidity protocols in the recent past. Most liquidations on the Aave protocol happened between 4:30 and 5:45 UTC when the price of ETH dropped nearly 13%. Below is a graph of liquidation by collateral and repay asset.\n![Liquidations by collateral and repay asset](https://i.imgur.com/gDTtU13.png)\nAlthough volatility for assets is slightly higher, the abundance of liquidity and active market participants is a positive sign for the health of Aave! For example, the total value of CRV (curve dao token) liquidated was large compared to the total collateral used on Aave. Lower LTV, lower liquidation threshold, and higher liquidation bonus protect the protocol from insolvencies. However, multiple liquidations of over 400,000 USD occured in quick succession. This shows ample liquidity for liquidators even in times of high network congestion. These market events provide important data points for measuring tail risk.\n\nFor reference, previous analysis of liquidations on Aave from May 2021 can be found here: https://medium.com/gauntlet-networks/aave-protocol-liquidation-retrospective-may-2021-67c655fc1b31\n\nAlthough some assets currently have higher volatility, our analysis shows that it is safe to increase borrowing parameters and decrease liquidation bonus values. Our simulations study price drops and network congestion more extreme than was seen last week, and slippage and liquidity considerations have improved.\n\n| Parameter | Current Value | Recommended Value |\n| -------- | -------- | -------- |\n| BAT Loan To Value     | 70%     | 75%     |\n| CRV Liquidation Bonus    | 10.0%     | 8.5%     |\n| ENJ Liquidation Bonus    | 10.0%     | 7.5%     |\n| REN Loan To Value     | 55%     | 60%     |\n| REN Liquidation Threshold     | 60%     | 65%     |\n| SNX Loan To Value    | 30%     | 40%     |\n| SNX Liquidation Threshold    | 55%     | 60%     |\n| SUSHI Liquidation Bonus    | 10.0%     | 8.5%     |\n| ZRX Loan To Value    | 60%     | 65%     |\n\n**Freezing KNCL**\nThe KyberDAO approved the proposal to [migrate KNC token contract](https://github.com/KyberNetwork/KIPs/blob/master/KIPs/kip-6.md) to a new implementation on 4/20, which enables Kyber governance to upgrade KNC efficiently. As of 11/2, 177M of KNC have migrated to the new [Kyber Network Crystal (KNC)](https://www.notion.so/7bcba345f687a2f1456f5edd9ce97202) and 74M of KNC are still in the old [KNC Legacy (KNCL) contract](https://www.notion.so/2e2928dea5f71b9825b8b646686bd200). There is currently 916K KNCL supply and 229k total borrowed on Aave.\n\nConsidering that exchanges (e.g. [Kraken](https://support.kraken.com/hc/en-us/articles/4401758213268-Kyber-KNC-token-migration), [Crypto.com](https://blog.crypto.com/crypto-com-supports-the-kyber-network-knc-token-migration/)) have stopped supporting KNCL deposit and trading, the liquidity of KNCL has also been reduced. We propose freezing KNCL to speed up the KNC migration as well as eliminating the risk of keeping a less liquid deprecated asset on the platform.\n\n\n\n\n## Risk Dashboard\n\n\n\nThe community should use Gauntlet's [Risk Dashboard](https://gov.gauntlet.network/aave) to better understand the updated parameter suggestions and general market risk in Aave V2. \n\n![](https://i.imgur.com/UV96hoq.png)\n\n\n\n\n## Implementation\n\nThe 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.\n\nThe full list of parameter updates can be found in the [forum](https://governance.aave.com/t/arc-risk-parameter-updates-2021-12-16/6646).\n\n## Copyright\n\nCopyright and related rights waived via [CC0](https://creativecommons.org/publicdomain/zero/1.0/).\n"}