{"aip":36,"title":"LTV and Liquidation Threshold Updates to Moderate Levels","status":"Proposed","author":"Nick Cannon (@inkymaze), Watson Fu (@wfu)","shortDescription":"LTV and Liq. Threshold Updates to Moderate risk levels.","discussions":"https://governance.aave.com/t/arc-ltv-and-liquidation-threshold-levels-2021-08-26/5467","created":"2021-09-09T00:00:00.000Z","preview":"## Simple Summary\n\nThree distinct levels from which …","basename":"AIP-36","description":"## Simple Summary\n\nThree distinct levels from which the community can select a preferred risk tolerance for Aave V2. \"Moderate\" was chosen via [Snapshot poll](https://snapshot.org/#/aave.eth/proposal/QmT9T4Rfnh1Z2HYmMPXvtFotMK2vSxiXK8dKStg2b6n4gi).\n\n## Abstract\n\nFrom a market risk perspective, the goal for Gauntlet’s simulations is to standardize Value-at-Risk (VaR) across all assets. Matching risk tolerance to a normalized expected yield throughout Aave V2 ensures no subset of assets adds disproportionate risk to the Safety Module.\n\nFollowing asset onboarding, empirical data on user behaviour (e.g., average health factors) and changes in market conditions (e.g., expected slippage) improve our simulation precision. Improved precision allows for higher confidence in model outputs—particulary for aggressive recommendations.\n\nGauging risk appetite is something Gauntlet will do quarterly to ensure our risk parameter recommendations track the preference of the Aave community.\n\n## Motivation \n\nThe existing [risk framework](https://docs.aave.com/risk/) has been instrumental in facilitating onboarding new assets. As expected and observed, liquidity risk, volatility risk, and market capitalization frequently change for all assets on Aave. Updating LTV and Liquidation thresholds to remain in lockstep with the market is key to improving the target metrics outlined in Gauntlet's [Dynamic Risk Parameters](https://governance.aave.com/t/proposal-dynamic-risk-parameters/4854#proposal-4) proposal.\n\n\n## Key Model Inputs & Notes\n\n| Asset | Volatility |\n| --- | --- |\n| USDC | 0.014 |\n| DAI | 0.017 |\n| TUSD | 0.031 |\n| WBTC | 0.72 |\n| WETH | 0.994 |\n| REN | 1.05 |\n| BAT | 1.08 |\n| YFI | 1.11 |\n| DPI | 1.12 |\n| LINK | 1.16 |\n| BAL | 1.17 |\n| MKR | 1.255 |\n| ZRX | 1.311 |\n| UNI | 1.331 |\n| KNC | 1.357 |\n| CRV | 1.4 |\n| XSUSHI | 1.51 |\n| ENJ | 1.612 |\n| AAVE | 1.72 |\n| SNX | 1.86 |\n\n- **WBTC**: Downside slippage values for WBTC have become smaller. This means liquidators see less slippage on trades and more liquidity. Additionally, a tight liquidation buffer will suffice given the lower market volatility.\n- **YFI**: Both slippage values and volatility have improved for YFI. The liquidation buffer shrinks between conservative and aggressive parameters due to marginal increase of liquidations observed during simulation. Doing so provides users an option to be more aggressive with starting positions should they choose.\n- **LINK**: Given market liquidity and LINK supplier's borrow positions, the aggressive setting will only include an increase in liquidation threshold.\n- **xSUSHI**: Recent liquidation analysis on empirical data, lacking previously, provides higher confidence that insolvency events can be mitigated. \n- **SNX**: The major concern with for SNX is that there is very high volatility and high slippage. The aggressive setting requires a larger delta between LTV and liquidation threshold to compensate for the additional risk. \n\n\n| Asset | Slippage Intensity Sell | Slippage Power Sell |\n| --- | --- | --- |\n| WBTC | -0.134 | 0.52 |\n| YFI | -1.003 | 1.008 |\n| LINK | -5.648 | 1.14 |\n| XSUSHI | -0.864 | 1.049 |\n| SNX | -17.007 | 1.477 |\n\nSlippage calculation takes the form below:\n![](https://i.imgur.com/E9x1sFS.png)\n\n## Implementation\nThe proposal sets the LTV and liquidation threshold ratios by calling `configureReserveAsCollateral` on the `LendingPoolConfigurator` contract at `0x311Bb771e4F8952E6Da169b425E7e92d6Ac45756`, using the address and parameters specific to each token.\n\nFull list of parameter updates can be found [here](https://governance.aave.com/t/arc-ltv-and-liquidation-threshold-levels-2021-08-26/5467/6?). \n\n## Copyright\n\nCopyright and related rights waived via [CC0](https://creativecommons.org/publicdomain/zero/1.0/).****"}