Thread by @ZeMariaMacedo

Following the launch of @AaveAave v2, an ARC has been posted to gather feedback around proposed Safety Module design. This includes:

👉 Slashing
👉 Incentives for stakers
👉 BPT staking

For his first daily, our new analyst @JonathanErlichL discusses these changes

Thread

👇

Slashing and staking incentives are essential parts of the SM and we didn't spend much time on these

Instead, we focus on the more controversial point of introducing allowing SM stakers to stake 80/20 $AAVE / $ETH pool BPT tokens in addition to $AAVE

We argue this is a necessary change, breaking the vicious cycle that can emerge as a result of Shortfall Events

Price falls --> Traders try to front-run $AAVE auction / mint --> Price declines more --> auction/mint gets more expensive

While it is impossible to estimate what the precise effect on price a shortfall event would have, looking at the past can help

Token prices have been aggressively hit (-18 to -53%) immediately following the hacks.

Crucially, none of these had native token backed insurance funds or mints. As such, the price impact of a shortfall event on $AAVE could be even greater

Adding uncorrelated, low volatility assets to the SM is an important step in breaking this vicious cycle

$ETH is an asset that presents low-to-moderate correlation to $AAVE (0.56) and consistently lower volatility

Note that the SM will still be highly exposed to Aave as the 80/20 pool means even if 50% of stakers stake BPT shares, the SM will be 90% AAVE. At 100% BPT shares, it will still be 80% AAVE

With the launch of governance v2, we look forward to proposals implementing stablecoins and other assets

We are also working on v2 of our aDAO proposal which will propose an intermediate step between the current SM and the aDAO model. Stay tuned for this 👀

You can read Jon's full daily on our website here: delphidigital.io/reports/the-be…

Or Jon's post on the Aave forums here: governance.aave.com/t/arc-aavenomi…

Also, if you haven't yet, give @JonathanErlichL a follow for more quality content like this