The discussion primarily revolved around an enhancement proposal for the AAVE Safety Module by Nicole Maffeo, co-founder of SIZE Markets. The proposal aims to incorporate SIZE's on-chain sealed-bid auction mechanism to facilitate efficient liquidation of staked AAVE tokens in the event of a Shortfall. The current Aavenomics model lacks a developed auction module, leaving uncertainties about the liquidation auction process. The proposal also addresses the challenges of the existing system, such as the 10-day withdrawal time constraint for staked assets and the potential for users to withdraw their stkAAVE before it can be used as insurance collateral.

Various alternatives to the proposed sealed-bid auction mechanism were discussed, including off-chain OTC directly to a market maker, TWAP selling on the open market, and a traditional English auction. However, each alternative presents its own challenges, such as vulnerability to front-running by speculators, concerns about centralization and transparency, and potential decrease in execution quality due to lack of on-chain liquidity¹. Nicole_maffeo suggested the use of sealed-bid auctions, also known as blind auctions, to mitigate these issues. This method hides bid prices until the auction ends, preventing extractive MEV and front-running, and allows for efficient price-discovery and more control over the auction process ¹.

John_TV_Locke raised a question about the applicability of the proposed solution in case an ETH or USDC auction was required to buy the token with bad debt, to which Nicole_maffeo confirmed that their SIZE auctions could be used to auction any x asset for y asset. She also mentioned that their auction contracts offer a guaranteed reserve price for the seller, incentivizing deeper liquidity than what is currently available for longer tail assets ⁴. This discussion has brought to light the need for a more efficient and secure auction mechanism for the AAVE Safety Module, and the proposed solution seems to be a promising step in that direction.