ChaosLabs initiated a proposal to adjust nine risk parameters across four Aave V3 Optimism assets, namely WBTC, WETH, USDC, and DAI. The proposed adjustments, which include Loan-to-Value (LTV), Liquidation Threshold (LT), and Liquidation Bonus, are based on extensive simulations run by Chaos Labs' Parameter Recommendation Platform. The platform aims to optimize these parameters to maximize protocol borrow usage while minimizing losses from liquidations and bad debt¹.

The simulations indicated that increasing LTVs and LTs for these assets could improve the capital efficiency of the system without affecting the projected VaR and EVaR. This could potentially result in a projected borrow increase of approximately $470,000, with no increase in VaR and Extreme VaR compared to simulations with the current parameters¹. The Total Value Locked (TVL) in Aave on Optimism is primarily concentrated in USDC (44%) and Ethereum (30%), with the remaining supply mostly being WBTC (13%). Given the high liquidity of these assets, Chaos Labs recommends increasing the LT and LTV for them and for DAI. They also suggest reducing the Liquidation Penalty for WBTC from 10% to 7%, closer to that of USDC and Ethereum (5%)¹.

However, Chaos Labs noted that around 50% of the on-chain supply of WBTC on Optimism is currently held on Aave, which calls for caution. They proposed an amendment to the supply cap to limit the concentration of liquidity on Aave¹. A Snapshot vote was scheduled to start on Tuesday, Mar 7, 2023, and end on Wednesday, Mar 10, 2023². However, due to events over the weekend and the de-peg of USDC and DAI, ChaosLabs decided not to proceed with the on-chain vote and stated that a new proposal would be posted separately³.