This is an archive of our post on Aave governance forum. Read the full thread here.

Summary

LlamaRisk supports deployment to the Sonic network with low initial supply caps on WETH, USDC, and S. Network TVL is growing rapidly but is still limited. These supply caps may be raised when liquidity is sufficient in the future through risk stewards.

We do not find significant risk stemming from Sonic’s chain infrastructure, though it is notable that there is no clear upgrade management process yet. The network is relatively decentralized, with 36 validators at this developmental stage. This validator count will likely continue to increase, further reducing centralization risk.

The present market infrastructure (e.g., DEXes) is sufficient and growing. While liquidity on the network restraints Aave’s growth, Sonic Labs is implementing thoughtful incentive strategies to improve this situation. It is also important to consider how an Aave deployment may affect network liquidity. Aave DAO should note that all stables are currently bridged, though natively-issued assets should be expected in the next month.

Considering this, we deem Sonic a suitable venue for an Aave deployment conditional to low supply caps on day 1. These supply caps may be increased as liquidity improves on the network, with caps roughly staying in line with a one-to-two times liquidity framework.

We suggest Aave onboards $USDC, $WETH, and $S on launch, with parameters aligned by Risk Providers closer to launch due to the developing liquidity situation. Other assets like $stS should be onboarded through regular governance processes.

1. Network Fundamental Characteristics

1.1 Network Overview

1.1.1 Architecture

Sonic is an EVM-equivalent Layer 1 platform that targets 10,000 TPS. It uses directed acyclic graph (DAG), asynchronous byzantine fault tolerant based proof of stake to reach consensus which is powered by its native $S token.

Source: DAG Visualization, Central Blockchain Council of America

Sonic is worked on by many contributors who also worked on Fantom, an L1 with a conceptually similar EVM-equivalent L1. This network’s consensus mechanism is a “continuation” of Fantom Opera.

Sonic is notable for its database storage techniques, in which validators push historical transactions to archive nodes to reduce storage requirements without going offline. This is known as “live pruning”.

1.1.2 Security

Change management processes are not detailed but will be announced before implementing onchain governance. Network bridges have been audited, and nonpublic consensus mechanism audits have been reviewed by LlamaRisk, which resolved 1 medium and 1 low finding. A $2M bug bounty is documented but does not yet have details relating to scope.

Source: Sonic Labs Audits

The network is new, with transactions reaching ~600K daily after launch on December 18th. This is lower than mainnet (~1.1M daily) and substantially lower than low-fee networks such as BNBChain at ~3.5M daily transactions. This is likely to increase as the network further establishes itself.

The primary network bridge (Sonic Gateway) is managed by a 2/4 Safe owned by Sonic Labs. This introduces significant risk and centralizes critical infrastructure into Labs’ hands. This Safe may change signers and thresholds, change ownership structures, and execute specific transactions. Other network bridges, such as Linea, use similarly permissioned bridges.

1.2 Decentralization and Legal Evaluation
This network is relatively well decentralized for having launched so recently with 36 validators. The amount of S staked to each validator is also well distributed, with 30 of these validators having more than 5M staked with them (versus ~80M for the top validator).

Source: Sonic Genesis Node Details, January 8th, 2025

Only one node client is documented, compared to Ethereum’s 8. This increases risk as a bug in the one-node client may result in the network not functioning as intended and no alternative solution to validate Sonic.

The network emphasizes its unique revenue redistribution system known as FeeM. This system is implemented to help sustain apps that deploy to the network with more regular income paid for by network fees. This may hinder decentralization as the returns for validators will be instead directed towards dApps on the network.

1.3 Legal Evaluation

By accessing and using http://www.soniclabs.com, users enter into a binding agreement with Sonic Labs Ltd, a company based in the Bahamas, and Sonic Foundation, a Cayman Islands-based entity. The Terms and Conditions (T&C) governing this agreement are explicitly limited in their application to activities conducted on http://www.soniclabs.com and the communication channels supported by these Sonic entities. This will not change as the migration from Fantom or Sonic concludes.

Importantly, T&C does not extend to Sonic Chain or any protocols developed on top of it. A distinct Important Notice provides disclosures and information specific to Sonic Chain.

1.4 Activity Benchmarks as of January 7th, 2025

Metrics Description TVL on Sonic $62M (not including $S, $72M if including) Market capitalization of $S $1.9B (of FTM, which is 1:1 redeemable for $S) Stablecoin TVL / dominance USDC 88% Number and concentration of protocols 5 protocols have >$500K TVL, 2 protocols (Beets and Wagmi) have ~80% of TVL 24 hour DEX volume ~$30M Perpetuals open interest N/A Total value borrowed $150,000 (Avalon, $S) Value at risk for a 15% drawdown N/A Bad debt accrued N/A Average supply APY (Stable or Volatile) (9% on $stS / $S on Beets, 2.5% on supplied $S on Avalon) Average utilization Rates for majors 75% on Avalon

Sources: DeFiLlama, Dune , January 7th, 2025

2. Network Market Outlook

2.1 Market Infrastructure
Sonic has core DeFi building blocks available:

• CDPs: Rings

• LSTs: beets.fi

• DEXs: beets.fi, Wagmi, Metropolis Exchange, Solidly

• Lending: Avalon - an Aave V3 fork

• Liquidity management: Stability

• Bridges: Sonic Gateway

• Wallets: Major EVM wallets such as Metamask, Rabby, and Frame support Sonic

• Onramps: None yet available

• Oracles: Chainlink, Band, API3, Pyth

• Exchanges: No exchanges currently support Sonic network withdrawals, but many networks will after token migration on January 13th

This network is new, so the diversity of these building blocks is limited. It is nonetheless true that key infrastructure is present in some form, with more options coming onchain every day. While the most critical of infrastructure (DEXs) has many options, liquidity is concentrated (with approximately >80% of network TVL held in two DEXs, Beets and Wagmi).

2.2 Liquidity Landscape
The network’s liquidity landscape is currently developmental and concentrated:

• 2 DEXs control more than 80% of the network’s TVL

• One CDP exists, which is growing on December 30th, 2024

• Only one lending protocol is live with $150K of outstanding borrows

Source: DefiLlama, January 8th, 2025

It is growing at an impressive rate, with 30% daily TVL increases occurring regularly. This is expected given the low base figure from which the TVL grows and the fact that much liquidity will migrate from the Fantom network as Sonic’s migration proceeds.

2.3 Growth Initiatives
Sonic’s ecosystem is carefully designed with sustainable growth and incentives strategy in mind. This network takes its growth strategy as seriously as any other part of its operation.

Source: Sonic’s airdrop strategy vesting schedule

The Sonic Boom program is a targeted bounty program for specific pieces of DeFi infrastructure (e.g. yield aggregators or lending protocols) that should accelerate the development of the network from the onset. Sonic is also airdropping 190M $S tokens to early users of the network (with the earned 25% unlocked, 75% vested). This will go some distance to reinforce the network by attracting liquidity that is looking to benefit from the airdrop. Finally, fee revenue sharing (outlined in section 1) will help this network create a self-sustaining ecosystem.

2.4 Major and Native Asset Outlook
Native tokens are widely available with some 37M wrapped Sonic onchain with 69M staked Sonic available. Liquidity for major tokens is more limited with 15M bridged USDC and 3000 ETH. Sonic Labs has informed LlamaRisk that this is likely to change drastically shortly.

3. Onchain discoverability

An Etherscan-equivalent block explorer, SonicScan, is available. DeFiLlama covers a wide range of active protocols. Dune and theGraph support Sonic.

4. Risk Impact of AAVE Deployment

Sonic’s network architecture presents few risks to Aave. Aave was already deployed to Fantom, a previous version of a DAG-type blockchain developed by the same team. As a newer network, its level of decentralization is already adequate at 36 validators with good staking distribution, making the likelihood of transaction censorship low. One area of risk stemming directly from the network is the lack of established change management. Upgrades to consensus mechanisms may have unintended consequences on Aave user funds if implemented imperfectly, introducing risk. This risk in an important area is reasonably likely to occur as the network develops. This risk is compounded by having only one node client, which results in limited redundancy.

Sonic’s ecosystem possesses key market infrastructure pieces to facilitate an Aave deployment. Aave has met its most basic functional needs with Chainlink oracles, numerous DEXs, a range of assets, major wallet support, and good bridge infrastructure.

However, this network is still new, and liquidity is still limited. With limited liquidity, liquidators may not profitably purchase and sell distressed Aave collateral positions, meaning bad debt may accrue. Risk providers must set limited supply caps to avoid this risk, meaning Aave may not generate meaningful revenue. This is not conducive to a highly successful Aave deployment and results in large costs for the DAO. At the same time, Sonic will incentivize Aave and commit deposits soon until those materialize; while thin liquidity does not present a risk to Aave deployment, it severely constrains its growth.

Onchain discoverability enables sufficient transparency to host an Aave deployment.

5. Asset suggestions

Asset parameters and price feeds will be aligned with Risk Providers before deployment and proposed to the DAO. We recommend the following assets be onboarded on day one:

• $WETH

• $wS

• $USDC

Other ecosystem assets such as $wstS or $USDT may be onboarded suitable for governance processes.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.