# Gauntlet Initial Risk Analysis - Aave V3 on GnosisChain

To assess the risk of deploying Aave to [GnosisChain](https://governance.aave.com/t/arfc-aave-v3-deployment-on-gnosischain/14695), we consider a few main metrics for wETH, wstETH, GNO, USDC, wxDAI, and EURe.

## Executive Summary

Gauntlet previously provided wETH, wstETH, USDC, DAI, and agEUR risk parameter recommendations for Aave V3 on [Ethereum](https://governance.aave.com/t/arc-aave-v3-ethereum-deployment-assets-and-configurations/10238/22?u=seawolf#gauntlet-recommendations-1), [Arbitrum](https://governance.aave.com/t/arc-gauntlet-recommendations-for-wsteth-on-aave-v3-arbitrum/12675), [Avalanche](https://governance.aave.com/t/arc-gauntlet-interest-rate-curve-changes-for-aave-v3-markets-feb-2023/11851), [Optimism](https://governance.aave.com/t/arc-gauntlet-risk-parameter-updates-for-aave-v3-optimism-2023-03-08/12216), [Polygon](https://governance.aave.com/t/arc-gauntlet-risk-parameter-updates-for-aave-v3-polygon-2023-02-27/12092), [Base](https://governance.aave.com/t/temp-check-aave-v3-deployment-on-base/13177/9), [zkSync Era](https://governance.aave.com/t/temp-check-aave-v3-deployment-on-zksync-era-mainnet/12477/11), and [BNB](https://governance.aave.com/t/arfc-aave-v3-deployment-on-bnb-chain/12609/13).

To formulate initial risk parameter recommendations on Aave V3 GnosisChain we use market data to adjust our previous Aave V3 recommendations.

Parameterizing new markets presents a challenge due to the lack of data on which to train simulation models. For this initial analysis, we assume that asset behavior on GnosisChain resembles that on comparable chains where Aave V3 operates.

The highest risk to Aave on GnosisChain lies in wETH liquidity against USD stablecoins. The majority of liquidity on GnosisChain exists [on Balancer](https://app.balancer.fi/#/gnosis-chain) between USDC/wxDAI and wETH/wstETH/GNO, with little liquidity connecting stable and non-stable assets.

Limited local liquidity on GnosisChain constrains the size of liquidations that can occur without distorting local market prices substantially from the benchmarks provided by external price oracles. If these distortions occur, liquidators may have to wait until cross-chain arbitrageurs stabilize prices. Accordingly, we recommend adopting conservative initial parameters based on our analysis.

## Recommended Initial Parameters
We recommend proceeding with the following initial parameters for wETH, wstETH, GNO, USDC, wxDAI, and EURe on Aave V3 GnosisChain.

| Risk Parameter | wETH | wstETH | GNO | USDC | wxDAI | EURe |
|-------------------------|------------|------------|------------|-----------|-----------|-----------|
| Isolation Mode | NO | NO | YES | NO | NO | NO |
| Enable Borrow | YES | YES | NO | YES | YES | YES |
| Borrowable in Isolation | NO | NO | NO | YES | YES | NO |
| Enable Collateral | YES | YES | YES | YES | YES | NO |
| Emode Category | ETH | ETH | NO | NO | NO | NO |
| Loan To Value | 71% | 69% | 31% | 77% | 71% | N/A |
| Liquidation Threshold | 76% | 77% | 36% | 80% | 76% | N/A |
| Liquidation Bonus | 7% | 10% | 10% | 5% | 5% | N/A |
| Liquidation Protocol Fee| 10% | 10% | 10% | 20% | 20% | 20% |
| Reserve Factor | 15% | 15% | N/A | 10% | 10% | 15% |
| Supply Cap | 2,000 wETH |3,000 wstETH| 10,000 GNO | 2MM USDC | 3MM xDAI | 1MM EURe |
| Borrow Cap | 200 wETH | 300 wstETH | N/A | 1.5MM USDC| 2.5MM xDAI| 0.5MM EURe|
| Isolation Mode Debt Ceiling| N/A | N/A | 1M USD | N/A | N/A | N/A |
| Stable Borrowing | NO | NO | NO | NO | NO | NO |
| uOptimal | 80% | 45% | N/A | 80% | 90% | 80% |
| Base | 0% | 0% | N/A | 0% | 0% | 0% |
| Slope1 | 3.8% | 7% | N/A | 4% | 4% | 4% |
| Slope2 | 80% | 300% | N/A | 75% | 60% |75% |

## General Overview

GnosisChain is a [Layer-1 blockchain](https://forum.gnosis.io/t/is-gnosis-xdai-a-sidechain-or-independent-l1/3163) that is also an Ethereum ecosystem sidechain for EVM-compatible networks. GnosisChain hosts a diverse DeFi ecosystem featuring platforms like Uniswap, Sushi, Curve, Balancer, CowSwap, and 1inch. In addition, GnosisChain is home to [EURe by Monerium](https://monerium.com/tokens/), enabling direct [Eurozone onboarding through SEPA transfers](https://monerium.com/guides/safe/).

### Gnosis Beacon Chain (GBC)
GnosisChain's security comes from the Gnosis Beacon Chain (GBC), which employs a Proof-of-Stake system for transaction validation similar to Ethereum's whereby users lock up an amount of GNO to participate in the transaction validation process and thereby receive additional GNO tokens as a reward for helping to secure the network.

#### Gnosis Bridge
The [bridge to GnosisChain](https://bridge.gnosischain.com/) introduces latency risk due to the time needed to transfer funds which can affect cross-chain arbitrage, particularly during large liquidations.

#### Ownership Distribution & Decentralization

GNO ownership is concentrated ([10% of total supply](https://gnosisscan.io/token/0x9c58bacc331c9aa871afd802db6379a98e80cedb#balances) held by [mGNO staking contract](https://gnosisscan.io/address/0x722fc4DAABFEaff81b97894fC623f91814a1BF68
)), potentially affecting decentralization and elevating risks associated with chain halts and transaction censorship.

## Summary Statistics
The graphs below demonstrate the shape of growth on GnosisChain.

### TVL: [~$78.7MM](https://defillama.com/chain/Gnosis?txs=false&tvl=true)

### Transactions: [~100K (24hr)](https://defillama.com/chain/Gnosis?txs=true&tvl=false)

### Users: [~10K (24hr)](https://defillama.com/chain/Gnosis?users=true&tvl=false)

### Net Inflows: [-$0.39MM (24hr)](https://defillama.com/chain/Gnosis?inflows=true&tvl=false)

## Asset Overview

This section discusses market and liquidity risk factors and outlines our methodology for determining appropriate asset-specific parameters.

Below is a summary of the [assets on GnosisChain](https://gnosisscan.io/tokens).

| Symbol | TVL | # Txns | Total Wallets | Net Top 5 Wallets |
|----------|-----------:|----------:|-----------------:|--------------------------:|
| [GNO](https://gnosisscan.io/token/0x9c58bacc331c9aa871afd802db6379a98e80cedb) | $54,421,829 | 1,479,426 | 27,308 | $40,701,404 (75%) |
| [wETH](https://gnosisscan.io/token/0x6a023ccd1ff6f2045c3309768ead9e68f978f6e1) | $24,031,843 | 4,006,106 | 33,740 | $18,957,044 (78%) |
| [wstETH](https://gnosisscan.io/token/0x6c76971f98945ae98dd7d4dfca8711ebea946ea6) | $19,372,746 | 3,215 | 28,771 | $19,261,178 (99%) |
| [wxDAI](https://gnosisscan.io/token/0xe91d153e0b41518a2ce8dd3d7944fa863463a97d) | $14,295,584 | 13,863,996 | 131 | $8,377,899 (59%) |
| [USDC](https://gnosisscan.io/token/0xddafbb505ad214d7b80b1f830fccc89b60fb7a83) | $9,682,685 | 28,985,467 | 60,354 | $5,225,297 (54%) |
| [EURe](https://gnosisscan.io/token/0xcB444e90D8198415266c6a2724b7900fb12FC56E) | $6,767,171 | 88,916 | 8,181 | $5,930,241 (88%) |

### Liquidity Landscape

On GnosisChain, Balancer v2 [ranks as the top DEX by TVL ($32.57MM)](https://defillama.com/protocols/dexes/Gnosis), followed by [Curve](https://xdai.curve.fi/) in second place ($10.48MM), Honeyswap in third ($4.79MM), and Sushi in fourth ($2.59MM).

GnosisChain liquidity saw a temporary drop in liquidity following the [Balancer V2 pool hack](https://twitter.com/Balancer/status/1694014645378724280?s=20) in late August 2023, but has since recovered.

Balancer also suffered a frontend phishing attack [in September 2023](https://x.com/Balancer/status/1704281611326357567?s=20) which prevented users from using the Balancer UI.

Curve's daily trading volume on Gnosis averages between $20-100k, with the majority concentrated in two pools: [3pool (wxDAI/USDC/USDT)](https://xdai.curve.fi/3pool) ($47k 24hr volume, 2023-09-18), and [eureusd (EURe+3pool)](https://xdai.curve.fi/eureusd) ($27k 24hr volume, 2023-09-18).

Additional wxDAI liquidity exists on Balancer's [wxDAI/USDC/USDT](https://app.balancer.fi/#/gnosis-chain/pool/0x2086f52651837600180de173b09470f54ef7491000000000000000000000004f) ($5MM TVL) and [wETH/BAL/GNO/wxDAI](https://app.balancer.fi/#/gnosis-chain/pool/0xa99fd9950b5d5dceeaf4939e221dca8ca9b938ab000100000000000000000025) ($400k TVL) pools.

Additional EURe liquidity exists on Balancer's [agEUR/EURe](https://app.balancer.fi/#/gnosis-chain/pool/0x5c78d05b8ecf97507d1cf70646082c54faa4da95000000000000000000000030) pool ($800k TVL), [staBAL3/EURe](https://app.balancer.fi/#/gnosis-chain/pool/0x0c1b9ce6bf6c01f587c2ee98b0ef4b20c6648753000000000000000000000050) pool ($3MM TVL), and [staBAL3/wstETH](https://app.balancer.fi/#/gnosis-chain/pool/0xeb30c85cc528537f5350cf5684ce6a4538e13394000200000000000000000059) pool ($3MM TVL).

We compile liquidity data from [12 different DEX sources](https://app.1inch.io/#/100/simple/swap/xDAI/settings/liquidity-sources) on GnosisChain using 1inch to evaluate aggregate liquidity and observe slippage on the trades below. Detailed routing information can be found in [the appendix](https://hackmd.io/9i2Sm7WSSDuVVWCAG7z1CQ?both#Detailed-Routing-Information).

| Symbol | 25% Depth (USD) | 2% Depth (USD) |
| ------ | ---------: | --------: |
|wETH<>USDC| $68k | $3.4k|
|wstETH<>USDC| $583k| $55k|
|GNO<>USDC| $114k| $10k |
|USDC<>GNO| $114k | $10k |
|wxDAI<>USDC| $4.4MM | $3MM |
|EURe<>USDC| $3.2MM | $897k |

wETH liquidity is weak against USD stablecoins on GnosisChain but wstETH liquidity is relatively strong due to Balancer's [staBAL3/wstETH](https://app.balancer.fi/#/gnosis-chain/pool/0xeb30c85cc528537f5350cf5684ce6a4538e13394000200000000000000000059) pool with around $3MM TVL.

The majority of liquidity for GNO exists on Balancer via the [wstETH/GNO](https://app.balancer.fi/#/gnosis-chain/pool/0x4683e340a8049261057d5ab1b29c8d840e75695e00020000000000000000005a) and [wETH/wstETH](https://app.balancer.fi/#/gnosis-chain/pool/0xbad20c15a773bf03ab973302f61fabcea5101f0a000000000000000000000034) pools, each with around $9MM TVL.
## Risk Parameter Methodology

### Enable Borrow
We recommend enabling borrowing for wETH, wstETH, USDC, wxDAI, and EURe with conservative borrow caps to help mitigate risk.

At this time, we do not recommend enabling GNO borrows because of limited stablecoin to non-stablecoin liquidity.

### Enable Collateral

We recommend all assets but EURe to be used as collateral due to EURe's relatively smaller TVL and depeg risk.

### Liquidation Threshold and Loan to Value
For wETH, wstETH, USDC, wxDAI, and EURe we use the most conservative (lowest) LT and LTV of those assets on other chains.

GNO, the native token of the GnosisChain, is the second largest token by market cap but lacks significant on-chain liquidity, with a 25% depth of ~$100k. GNO has a market cap of $200MM, placing it below the other DeFi governance tokens listed on Aave V3 Ethereum like UNI, LINK, AAVE, SNX, MKR, and SUSHI.

We recommend initially launching GNO in isolation mode with LT of 31% and LTV of 28% as a conservative starting point.

### Liquidation Bonus (LB)
Gauntlet recommends setting LB to 5% for stablecoin assets (USDC, wxDAI, EURe) and 10% for wstETH and GNO.

Given the limited wETH liquidity on Gnosis, we recommended an LB of 7% for wETH upon listing compared to wstETH’s LB at 10% to incentivize more liquidations of wstETH as collateral and relatively reduce liquidity needs for wETH.

### Liquidation Protocol Fee (LPF)
Gauntlet recommends that stablecoins have 20% LPF and non-stablecoins have 10% LPF to allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience.

LPF is important to help build reserves over time to counter potential insolvencies but it is valuable to ensure liquidators are not disincentivized due to a high relative LPF. Non-stablecoins are more volatile and may incur more slippage during liquidations. To ensure liquidator incentives remain robust, we recommend a lower LPF for non-stablecoins.

### Interest Rate Curves
We recommend setting the interest rate curves for existing assets following the same values they have on other chains, as guided by [Gauntlet's Interest Rate Curve Changes for Aave V3 Markets](https://governance.aave.com/t/arc-gauntlet-interest-rate-curve-changes-for-aave-v3-markets-feb-2023/11851). The recommended interest rates are aligned with [Aave V3 parameter presets](https://docs.aave.com/risk/liquidity-risk/borrow-interest-rate).

To ensure ample wETH liquidity for timely liquidations, we recommend an 80% Optimal Utilisation Ratio.

### Reserve Factor
We recommend using the same Reserve Factors of similar assets on other chains for wETH, wstETH, USDC, wxDAI, and EURe.

### Isolation Mode

Following the conservative recommendation from [Gauntlet's Aave V3 Isolation Mode Methodology](https://governance.aave.com/t/gauntlet-aave-v3-isolation-mode-methodology/12290), we recommend GNO launch in Isolation Mode because of low float (75% of supply held by top 5 wallets) that could be subject to price manipulation risk.

We recommend the debt ceiling be set to be the minimum of:
1. 15% of the token’s circulating market cap and
2. 20% of the available liquidity of assets that can be borrowed in isolation mode.

This implies a debt ceiling of $1MM for GNO in Isolation Mode to reduce overexposure risk to isolated assets

Assets in isolation mode can later progress to a less restrictive listing if market conditions around the asset develop positively.

### eMode
We recommend the ETH eMode pools start with the same parameters as Ethereum mainnet and Optimism: 93% LT, 90% LTV, and 1% LB.

We recommend excluding USDC, wxDAI, and EURe from Stablecoin eMode to mitigate protocol risk due to these assets either lacking mean-reversion, not showing stable correlation, or not being fully pegged and collateralized by USD.

#### Additional Risks
This eMode approach necessarily assumes price correlations among assets, which may not be valid under some extreme market conditions. For example, there could be a smart contract issue breaking the peg for multiple assets at the same time. In these scenarios, the protocol may face outsized risk that cannot be easily protected by risk parameters prior to the event occurring.

### Borrowable in Isolation
We recommend enabling only USDC and wxDAI borrowing in Isolation Mode because they are the stablecoins with the highest liquidity on Gnosis.

### Borrow and Supply Caps

Initial supply and borrow cap recommendations are generated following [Gauntlet’s Borrow and Supply Cap Methodology](https://governance.aave.com/t/gauntlet-methodologies-borrow-and-supply-cap/11487).

Given the novel risk factors involved in the Aave V3 deployment on GnosisChain, it may be prudent to ramp up to maximum potential exposure by starting with lower initial supply caps to limit maximum protocol losses.

## Useful Links
- Gnosis Chain: [EVM](https://www.gnosischain.com/evm)
- Gnosisdao: [Gnosis GnosisDAO](https://www.gnosis.io/about)
- Governance forum: [GnosisDAO - Gnosis](https://forum.gnosis.io/)
- Gnosis Chain Information & Resources: https://gnosischain.world/
- Gnosis Blog: https://blog.gnosis.pm/
- Gnosis Docs: [Gnosis Developer Portal Gnosis Protocol · Gnosis Protocol](https://docs.gnosis.io/protocol/)
- DefiLlama Balancer v2 pools on Gnosis: https://defillama.com/protocols/dexes/Gnosis
- Curve 3pool: https://xdai.curve.fi/3pool
- Aave V# deployment on BNB Chain: https://governance.aave.com/t/temp-check-aave-v3-deployment-on-bnb-chain/12412/17
- Gauntlet Aave V3 Isolation Mode Methodology: https://governance.aave.com/t/gauntlet-aave-v3-isolation-mode-methodology/12290/1
- Gauntlet's Borrow and Supply Cap Methodology: https://governance.aave.com/t/gauntlet-methodologies-borrow-and-supply-cap/11487
- Data: Aave V3 on Gnosis Chain: https://docs.google.com/spreadsheets/d/1882T3rSnjhmyF_gsetDFWLwN0m1yGFDAmmlDzzXplUw/edit?usp=sharing
- Risk Assessment and Parameter Recommendations for Spark Protocol on Gnosis Chain: https://forum.makerdao.com/t/risk-assessment-and-parameter-recommendations-spark-protocol-on-gnosis-chain/21629
- Agave Lending Dashboards: https://agave.riskdao.org/#collateral-factors

## Appendix

### GnosisChain

GnosisChain's architecture closely resembles Ethereum's proof-of-stake model, featuring its own execution-layer EVM chain that uses xDAI stablecoin for transactions and fees.

Gnosis runs the same client software as Ethereum, [with minor parameter tweaks](https://docs.gnosischain.com/node/#:~:text=Gnosis%20runs%20the%20same%20client,uses%20Ethereum's%20Beacon%20Chain%20consensus.). As such, Gnosis is a Proof-of-Stake network that uses Ethereum's Beacon Chain consensus.

Lower entry costs make Gnosis more accessible for validators; it requires only 1 GNO (~$100, Sep 2023) instead of Ethereum's 32 ETH ($50,000, Sep 2023). This ease of validator entry and centralized GNO ownership increases the risk of chain halts and transaction censorship.

Like Ethereum, GnosisChain provides multiple [execution and consensus layer clients](https://docs.gnosischain.com/node/#requirements). A diverse client base enhances chain security by reducing the likelihood of invalid state changes. However, over two-thirds of the GnosisChain [validators](https://gnosischa.in/charts) use the same client, increasing the risk of invalid state transitions due to client bugs, which could affect Aave on Gnosis.

Source: [GnosisChain node tracker](https://gnosisscan.io/nodetracker).

On the whole, Gnosis benefits from using a similar technical architecture to Ethereum, facilitating knowledge transfer and adoption of best practices. However, ownership concentration and lower client diversity may lead to increased chain-level risks.

### [Gnosis Ecosystem dApps](https://github.com/gnosischain/documentation/blob/580a9c7f6128b3caa10cde5e01e228a19c1b43e5/docs/ecosystems/defi.md?plain=1#L3C36-L3C57)

#### Decentralized Exchanges (DEXes)

* [Sushi](https://sushi.com): Swap, earn, stack yields, lend, borrow, leverage all on one decentralized, community driven platform
* [Uniswap](https://app.uniswap.org/): Swap, earn, and build on the leading decentralized crypto trading protocol
* [Cowswap](https://cowswap.exchange/): COWs (Coincidence of Wants) or MEV protected trades
* [Balancer](https://balancer.fi/): Balancer is a decentralized automated market maker (AMM) protocol that represents a flexible building block for programmable liquidity.

#### DEX Aggregators

* [1inch](https://1inch.io/): Optimize your trades across hundreds of DEXes on multiple networks.
* [Curve](https://xdai.curve.fi/): Creating deep on-chain liquidity using advanced bonding curves.
* [Xion Finance](https://xion.finance): DEX Aggregator, Staking, Governance and Multi-Chain Launchpad Protocol.
* [UniDex](https://www.unidex.exchange/): The power to aggregate all activity in DeFi at your fingertips. We aggregate AMMs, derivatives, aggregators, and more for you.

#### Derivatives

* [Perp](https://perp.com): On-chain perpetual futures DEX with deep liquidity and builder-ready composability.
* [Deus](https://deus.finance): World-first decentralized bilateral OTC derivatives platform.

#### Infrastructure

* [Hedgey](https://hedgey.finance/): Financial infrastructure for DAO treasuries. Escrowless OTC. D2D Swaps. Time-locked token distributions and more.
* [Carrot](https://carrot.eth.limo): Carrot grants permissionless access to create community-driven programmable incentives, distributing rewards when set criteria are met.

#### Lending

* [Agave](https://agave.finance): A decentralized, non-custodial money market and lending protocol on Gnosis Chain

#### Yield Farming

* [Bao Finance](https://bao.finance): Stake Sushiswap and Baoswap LP tokens to earn BAO
* [Mixsome](https://mixsome.cash/): Create yield generating flows with DeFi Money Blocks
* [DeHive](https://dehive.finance): Create and grow your tokenized portfolios

#### Asset Management

* [Debank.com](https://Debank.com): The leading Web3 portfolio tracker that supports the LARGEST number of DeFi protocols across 30+ chains

### Chainlink Price Feeds on Gnosis
[Price Feeds](https://docs.chain.link/data-feeds/price-feeds/addresses/?network=gnosis-chain&page=1&search=eur):
- ETH / USD [Chainlink Oracle](https://gnosisscan.io/address/0xa767f745331D267c7751297D982b050c93985627)
- stETH / USD, [Chainlink Oracle](https://gnosisscan.io/address/0x229e486Ee0D35b7A9f668d10a1e6029eEE6B77E0)
- GNO / USD, [Chainlink Oracle](https://gnosisscan.io/address/0x22441d81416430A54336aB28765abd31a792Ad37)
- USDC / USD, [Chainlink Oracle](https://gnosisscan.io/address/0x26C31ac71010aF62E6B486D1132E266D6298857D)
- DAI / USD, [Chainlink Oracle](https://gnosisscan.io/address/0x678df3415fc31947dA4324eC63212874be5a82f8)
- EUR / USD, [Chainlink Oracle](https://gnosisscan.io/address/0xab70BCB260073d036d1660201e9d5405F5829b7a)

### Detailed Liquidity and Routing Information

#### [Curve 3pool](https://xdai.curve.fi/3pool)


#### [wETH <> USDC](https://app.1inch.io/#/100/classic/swap/WETH/USDC)

##### 2% Depth


1inch routes wETH<>xDAI across a few DEXes and then swaps all the xDAI<>USDC using the Curve 3pool.

##### 25% Depth


#### [wstETH <> USDC](https://app.1inch.io/#/100/classic/swap/WSTETH/USDC)


##### 2% Depth

When routing the wstETH, 1inch prefers to swap everything via the Balancer V2 pools which provide deeper market liquidity.

##### 25% Depth


#### [GNO <> USDC](https://app.1inch.io/#/100/classic/swap/GNO/USDC)

##### 2% Depth


##### 25% Depth


#### [USDC <> GNO](https://app.1inch.io/#/100/classic/swap/USDC/GNO)

##### 2% Depth


##### 25% Depth


#### [wxDAI <> USDC](https://app.1inch.io/#/100/classic/swap/WXDAI/USDC)

##### 2% Depth


##### 25% Depth


#### EURe<>USDC

##### 2% Depth

##### 25% Depth