Joint Recommendation:
Given the similarities between Chaos’ and Gauntlet’s recommendations (analyses below), we recommend moving forward with Gauntlet’s recommendations as they are slightly more conservative.
Regarding supply and borrow caps, we recommend starting with the lower recommended caps provided by Gauntlet and considering increasing them in the future depending on supply and borrow demand.
Parameter Recommendations
| Symbol | Isolation Mode | Borrowable | Collateral Enabled | LTV | LT | LB | RF | LPF | Debt Ceiling | Supply Cap | Borrow Cap |
|---|---|---|---|---|---|---|---|---|---|---|---|
| wstETH | NO | YES | YES | 70% | 79% | 7.2% | 15% | 0.10 | N/A | 1200 | 190 |
eMode - LT 93%, LTV 90%, LB 2% (conditioned on stETH/ETH oracle and other necessary oracles on Arbitrum)
- The Snapshot should include options a Yae/Nae option for emode for the community to vote on.
IR Curves
| Parameter | Recommendation |
|---|---|
| Base | 0.0025 |
| Slope 1 | 0.045 |
| Uoptimal | 0.45 |
| Slope 2 | 0.8 |
| Reserve Factor | 0.15 |
Gauntlet Analysis
| Symbol | Isolation Mode | Borrowable | Collateral Enabled | LTV | LT | LB | RF | LPF | Debt Ceiling | Supply Cap | Borrow Cap | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gauntlet | wstETH | NO | YES | YES | 70% | 79% | 7.2% | 15% | 0.10 | N/A | 1200 | 190 |
Gauntlet has previously provided wstETH param recommendations for Aave v3 Ethereum and Aave v3 Optimism, which serve as the foundations for the following wstETH initial parameter recommendations on Aave v3 Arbitrum.
As noted in our wstETH param recommendations for Aave v3 Optimism, parameterizing new markets provides a specific challenge due to the lack of user data to train simulation models. That said, we anticipate wstETH to act similarly on Aave v3 Arbitrum as on v3 Optimism, and thus made adjustments to the LTV, LT, Supply Cap, and Borrow Cap from our v3 Optimism recommendations that we put in place here.
We recommend the following initial parameters for wstETH on Aave v3 on Arbitrum:
Isolation Mode - No
Borrowable - Yes
Collateral Enabled - Yes
eMode - Yes, LT 93%, LTV 90%, LB 2% (conditioned on stETH/ETH oracle and other necessary oracles on Arbitrum)
wstETH ‘s market risk in eMode on Aave v3 Arbitrum is relatively minimal given the conservative proposed borrow and supply caps and its correlation with the LSD assets, thus we recommend eMode settings the same as those we recommended for wstETH on Aave v3 Optimism. Note the slippage incurred on Arbitrum when swapping wstETH for WETH:
Supply Cap (in tokens) - 1200 / Borrow Cap (in tokens) - 190
Gauntlet recommends reducing the Supply Caps and Borrow Caps from our v3 Ethereum and Optimism recommendations to 1200 and 190, respectively. While wstETH on both Arbitrum and Optimism are less liquid than wstETH on Mainnet Ethereum, wstETH is less liquid on Arbitrum than on Optimism, and a supply and borrow cap closer to that recommended for Optimism (6000 and 940, respectively) increases slippage to nearly 70% in the case of a whale liquidation. Further, a sell of 330,000 wstETH to WETH on Ethereum yields a ~1.0% slippage:
compared to 900 wstETH to WETH on Arbitrum:
which is a difference of over ~99%. These diluted caps will mitigate unknown tail risks while giving the market ample time to naturally evolve and grow. In the case that the wstETH market grows quickly due to its greater use cases as compared to stETH, we can meet rapidly increasing demand with proactive updates as needed.
LTV - 70.0% / LT - 79.0%
For LTV and LT, we recommend dividing the LTV and LT of our wstETH v3 Ethereum recommendation by v2 WETH LTV (LT) / v3 Arbitrum WETH LTV (LT). The v3 Arbitrum WETH LT is 82.5%, compared to 86% on v2. Since the wstETH v3 Ethereum LT and LTV recommendations are derived from v2 Ethereum, this would allow us to initialize Arbitrum wstETH with the same relative risk profile for stETH on v2 (as compared to WETH). This results in an LT of 79% and LTV of 70% for wstETH on v3 Arbitrum.
Liquidation Bonus - 7.2%
Gauntlet recommends initializing with the same LB for wstETH on v3 Ethereum, adjusted by the ratio between WETH v2 LB and WETH v3 Arbitrum LB to account for implicit behavioral differences between liquidations on Arbitrum vs Ethereum. This results in 7.2%.
Liquidation Protocol Fee - 10%
Gauntlet has recommended a 10% LPF for the LPF of wstETH on v3 Ethereum and Optimism. For v3 Arbitrum we recommend the same. This, again, will allow for protocol revenue from LPF while minimizing effects on liquidator behavior and user experience. The LPF is a percentage of the LB that ultimately contributes to Aave reserves. LPFs, like LBs, are intimately linked to liquidation behavior, as they serve as the primary incentive for liquidators. As such, more data is needed going forward to conduct analyses on what optimal LPFs should be. A high LPF and unadjusted LB may deter liquidators from conducting liquidations due to fears of unprofitability. A high LPF with an upwards adjusted LB to ensure bonuses for liquidators similar to v2 may cause too much of the collateral to be eaten up by liquidations, which also impacts liquidator behavior.
Reserve Factor - 15%
Gauntlet recommends wstETH reserve factor to be that of the reserve factor for recommended wstETH on Ethereum and Optimism, which is 15%.
IR Curve
While it is difficult to formulate Interest Rate curves for new assets, we recommend conservative parameters that match those recommended for wstETH on Aave v3 Ethereum and Optimism.
| Parameter | Recommendation |
|---|---|
| Base | 0.0025 |
| Slope 1 | 0.045 |
| Uoptimal | 0.45 |
| Slope 2 | 0.8 |
| Reserve Factor | 0.15 |
|  |
Chaos Analysis
| Symbol | Isolation Mode | Borrowable | Collateral Enabled | LTV | LT | LB | RF | LPF | Debt Ceiling | Supply Cap | Borrow Cap | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Chaos | wstETH | NO | YES | YES | 68.5% | 79.5% | 7% | 15% | 0.10 | N/A | 2400 | 1320 |
We recommend the following initial parameters for wstETH on Aave v3 on Arbitrum:
Isolation Mode - No
Borrowable - Yes
Collateral Enabled - Yes
LTV - 68.5% / LT - 79.5%/LB - 7%
For the above parameters, we recommend the same ones that we recommended and were set for wstETH on Ethereum V3, as they are set conservatively and we anticipate similar asset volatility.
Liquidation Protocol Fee - 10%
We recommend that the LPF be in line with our recommendation for wstETH, cbETH, and rETH on Ethereum V3. This is a default parameter configuration that should be revisited with more liquidator behavior data.
Reserve Factor - 15%
We recommend that the RF be in line with our recommendation for wstETH, cbETH, and rETH on Ethereum V3.