TLDR: Risk management platform Gauntlet is requesting a twelve-month work agreement from the Aave community to continue its previous work securing the DeFi protocol. Aave counts on various ecosystem contributors to further decentralize and strengthen the protocol’s security.
Aave is a leading DeFi liquidity protocol celebrated not only for its dynamic features but also for its robust ecosystem of contributors, service providers, and developers. Current providers working with Aave include Llama, Certora, BGD Labs, Chaos Labs, Sigma Prime, Aave Companies — and Gauntlet, which has been working with Aave in some capacity since the early days. Gauntlet describes itself as a “financial modeling platform that uses battle-tested techniques from the algorithmic trading industry to inform on-chain protocol management”; its current list of clients includes Synthetix, Compound, and Maker, among others.
Gauntlet’s first quarterly engagement with Aave was brought forward in the forums in July of 2021. The following quarter, an annual engagement was proposed for an annual payment of 16,412 AAVE. As the current engagement is set to end on December 4 of this year, Gauntlet hopes to extend its relationship with the protocol as it expands to new markets and migrates to a new protocol version (Aave v3).
On November 1st, Paul Lei, Protocol Program Manager at Gauntlet, posted to the Aave forums a proposal outlining the scope, expectations, and compensation model for the proposed work agreement. In the proposal, Gauntlet details continued work on previously covered domains at Aave alongside Aave v3 support and new feature building. The proposal would have the firm formally engaged with the protocol from December 5. 2022 to December 5, 2023.
The firm describes the scope of their work to be in lockstep with a quickly expanding Aave protocol. Gauntlet’s focus and key metrics will center around managing market risk and optimizing capital efficiency through three KPI measures. The first is ‘Value at Risk’, a measure of how much potential capital is at risk during market duress, second is ‘Liquidations at Risk’, a measure of capital that is at risk of being liquidated during market duress, and lastly is ‘Borrow Usage’, a measure of how much depositors of collateral are borrowing against their supply. As with everything else in governance, communication is important and Gauntlet outlines a communication strategy to include forum posts, relevant dashboards, and overall continued active participation within Aave.
Total compensation is estimated to be ~$2.4M, with 70% denominated in stablecoins and 30% in AAVE. Note the radical reduction in cost, due to a reduction in the Total Borrow amount on Aave; also new and significant is Gauntlet’s promise to “refund a portion of our payment [30%] should our risk parameter optimizations incur insolvencies during the engagement.”
Aave Requests for Comment (ARC) are the first step in the protocol's governance process. During this phase proposals seek community input, feedback, and comments to improve the proposal text. Once satisfied, the proposal can move to a snapshot vote to check community consensus on the proposal plans. Once passed, an AIP vote occurs onchain that lasts 7 days.
Gauntlet’s proposal sits in the community feedback period and has already received positive feedback. The firm hopes to have a snapshot vote up by November 15th, with a follow-up onchain vote on November 29th.
As we wrote in a previous brief, business-to-DAO relationships are becoming more common as decentralized organizations attempt to figure out how best to have certain critical protocol needs taken care of. If these needs (such as security, risk, and treasury management) were to be taken care of internally — by a governing council, for example, which may or may not have the required expertise — the protocol would run the risk of centralization. By having vendors apply through the DAO’s governance process for service contracts, the entire community can vet the proposed agreements, identify the best providers, and monitor the results on a continuous basis.
Aave DAO is among the leaders in this regard, having at this point agreed to long-term engagements with several leading service providers, including Certora, Llama, Sigma Prime, and now Gauntlet. The key will be to determine to what extent the services provided are complementary and to what extent they are redundant or even conflicting. (See the contention following the proposal for engagement from Chaos Labs, which takes a different approach to risk management.) What if providers present very different risk assessments? What happens if certain recommendations prove to be disastrously wrong? Also, of course, the DAO must attempt to accurately weigh the value of these services when there is very little precedent for doing so. Fundamentally, the value Gauntlet brings is in the prevention of catastrophe while setting parameters in such a way that improves capital efficiency for the protocol. The precise degree of success is difficult to demonstrate in any absolute sense other than through the absence of problems and the presence of continuing revenue.
Gauntlet has not only established a very strong track record of recommendations for Aave (and other protocols), but it has been among the pioneers in presenting a valuation of its own ongoing services — a valuation that is dependent on the success of the protocol. Yes, “incentive alignment”; but also deep involvement. By receiving 30% of their fee in AAVE, Gauntlet maintains its strong governance presence. As Paul Lei writes in the proposal, “Gauntlet charges a service fee that seeks to be commensurate with the value we add to protocols and provides strong alignment with the protocol.” The relationship is essentially symbiotic: what is good for Aave is (generally) good for Gauntlet, and vice-versa. There is a positive feedback loop at the protocol where specialized providers actively look to contribute because they can count on a mature governance process to secure them appropriate funding (or not, if the proposal falls short). These are novel business relationships in an experimental space. We will see how it all unfolds.