Dynamic WETH Borrowing Rates using AGRS and Edge on Lido Market
Summary
As AGRS + Edge activation goes to AIP, we propose a pilot to demonstrate the capabilities of the system. This proposal introduces an interest rate strategy oracle for WETH on the Aave Lido Market on Ethereum. Utilizing BGD Labs’ new risk steward contract, the risk oracle will adjust WETH borrowing rate parameters daily in response to changes in Lido’s staking rewards. The primary goal is to ensure that the WETH borrowing cost remains below Lido’s staking rewards, maintaining the profitability of the wstETH/WETH looping strategy for users.
The pilot program for this implementation will last for one month. At the end of this period, a historical analysis will be published, covering metrics such as WETH utilization and borrowing costs. Based on the outcomes, there will be plans to expand the solution to other assets if the pilot demonstrates positive results
Motivation
The Aave Lido Market was established to support leveraged staking strategies, enabling users to supply wstETH as collateral and borrow WETH to loop their positions. This strategy has proven beneficial for both the Aave and Lido ecosystems, boosting liquidity and user engagement. However, the profitability of this looping strategy depends on a key factor: the borrowing cost of WETH must stay below Lido’s staking rewards.
Lido’s staking rewards, which rebase daily, fluctuate and directly impact the incentive for users to participate in the looping strategy. When staking rewards decrease, the appeal of looping diminishes, potentially leading to underutilization of the WETH pool. Although underutilization may cause borrowing rates to drop, the strategy may still fall short of profitability without further adjustments, limiting user interest. Conversely, when staking rewards increase, more users are drawn to the looping strategy, driving up WETH pool utilization.
Utilization Rate and Interest Rate Model
As utilization approaches the Optimal Utilization point and shifts into Slope2 of the interest rate model, even slight increases in utilization can sharply spike borrowing costs due to the steeper slope. This heightened volatility in borrowing rates can make the looping strategy unpredictable and deter user participation. Therefore, to sustain the strategy’s appeal and viability, a mechanism is needed to adjust WETH borrowing rates in sync with Lido’s staking rewards and pool utilization. This alignment helps to keep borrowing costs in line with staking rewards while mitigating rate volatility.
Influence of Liquid E-Mode Configurations
The enhanced Liquid E-Mode configurations in the Lido Instance create additional demand for wstETH borrowing, encouraging users to pursue looping strategies for wstETH interest accrual. This growing demand impacts ETH interest rates, leading to upward rate pressure that increases what users are willing to pay. To stabilize rates in this environment, the risk oracle should consider the wstETH supply rate, helping to moderate potential volatility and sustain consistent lending conditions.
1. Edge - Risk Oracle
- The risk oracle will retrieve the current Lido staking rewards rate once a day, aligning with the stETH rebasing schedule.
- The new Slope1 will be set to Lido’s staking rewards minus a predefined buffer (initially 0.5%) to account for market volatility and incentives.
- The initial buffer of 0.5% provides a safety margin to accommodate minor fluctuations in staking rewards and market conditions.
- The buffer may be adjusted based on the level of incentives and market feedback to optimize profitability and risk management.
- Update Frequency:
- Adjustments will occur once daily to align with stETH rebasing.
- Parameter Adjustments:
- While the risk oracle has the technical capability to adjust the entire interest rate strategy (base rate, optimal utilization, slope 1, slope 2) under the constraints of the risk stewards, the most updated parameter will be slop 1.
- Monitoring and Transparency:
- All adjustments and calculations will be transparent and auditable, with data available for community review.
2. AGRS
- The risk steward contract will enforce the constraints:
| Parameter | Percent change allowed | minimumDelay |
|---|---|---|
| Base Variable Borrow Rate | 0.5% (absolute change) | 3 days |
| Slope 1 | 0.5% (absolute change) | 3 days |
| Slope 2 | 5% (absolute change) | 3 days |
| Optimal Point (Kink) | 3% (absolute change) | 3 days |