[ARFC] Activate emode for cbETH Aave Ethereum V3


title: [ARFC] Activate emode for cbETH Aave Ethereum V3

Author: @marczeller - Aave Chan Initiative

Dated: 2023-02-27


Summary

cbETH is a centralized Liquid Staking Derivative minted by Coinbase

CbETH is minted by coinbase when users Stake ETH.

For more information about cbETH please refer to cbETH V3 ARC

This ARFC presents the Aave governance with the opportunity to Activate emode for cbETH Aave Ethereum V3 market.

Abstract

This ARFC proposes to add cbETH asset to emode category “1” for “ETH correlated” assets.

Motivation

cbETH is currently the second largest ETH Liquid staking derivative of the V3 market.

Allowing the activation of emode has a clear use-case for leveraged strategies based on cbETH as collateral to both “long” cbETH currently at a small discount on secondary markets and increased staking yield via loops strategies.

With the current supply and borrowing caps, this activation can be done while keeping a conservative approach.

Specification

Ticker: cbETH (cbETH)

Contract Address: 0xBe9895146f7AF43049ca1c1AE358B0541Ea49704

the AIP implementation is to call setEModeCategory() from POOL.CONFIGURATOR to set it to 1

more technical details will be available in payload deployment & contracts published at the AIP stage of this proposal

Disclaimer

The Aave-Chan Initiative is not linked nor paid by Coinbase to publish this ARFC

The ACI supports LSD diversity as part of its delegate platform

At the time of Writing, Marc Zeller, ACI’s founder, does not hold any cbETH.

Copyright

Copyright and related rights waived via CC0,

6 Likes

Hey Mark. What are the proposed emode values for cbETH (LTV, liquidation threshold, penalty, etc)?

hello, emode is per category not per asset so will be same than other asset in this category

2 Likes

Thank you! Is this something that needs to go through a governance vote or would it be upgraded in the same way that the recent cap change was done?

this proposal requires a snapshot and AIP.

Thanks Marc for starting this discussion.
This is a very exciting prospect for Aave. eMode enabled cbETH will make Aave the most competitive place for cbETH to be used as collateral (even more so than it is today).
The cbETH peg has shown resilience after the Kraken/SEC news and with Shanghai soon™ this is a great time to have this discussion and hopefully move forward with this.

1 Like

Overview

The motivation to add cbETH to E-Mode is high, as it is a fast-growing LSD with a market cap well above $1B over time. Adding cbEth to E-Mode will contribute significantly to making Aave the protocol of choice to utilize LSDs and cbETH, specifically. Since its launch, cbETH has held its peg firmly, making it a good candidate for the ETH-correlated E-Mode category.

Considerations of adding cbETH to the E-Mode category

When evaluating cbETH addition to E-Mode, we look at stability and liquidity considerations. Stability, or asset volatility, is the primary consideration for understanding how well the asset can perform given the E-Mode LT setting (93%). On-chain liquidity and liquidity concentration are the primary considerations to understand the efficiency of potential E-Mode positions liquidations under the E-Mode Liquidation Penalty settings (1%).

Stability

cbETH has been around for less than six months, limiting the historical data sample. Considering the historical price range, which stabilized a couple of weeks after launch, the 93% LT of the ETH E-Mode category should accommodate the short-term volatility of cbETH.


CBETH/ETH Price History since launch. Source: Coinbase

Liquidation Penalty

cbETH liquidity is highly concentrated, so even if E-Mode is not enabled, most liquidation will occur around the 1% price slippage. Because of this, we believe that even if a significant portion of the supply will be in E-Mode (with LP set at 1%), it will not add oversized risk to the protocol. We will continue to monitor on-chain liquidity and market behavior for anomalies, changes, and supply cap utilization.

wstETH vs. cbETH

A challenging case is the borrowing and lending of wstETH against cbETH. While each of the LSDs appreciates steadily in value against ETH, we see that the price divergence between two LSDs can fluctuate more drastically. With cbETH being the second LSD introduced to this E-Mode category, we think it is important to formulate the community’s approach to LSDs in E-Mode:

Option 1 - Maximize the utilization of LSD/ETH positions. This will enable setting high LT leading to very high capital efficiency as the volatility of each LSD vs. ETH is limited. This setting still allows sophisticated traders who manage their positions consistently to open LSD/LSD positions with high capital efficiency, but they will need to be monitored consistently to be kept at adequate collateral levels.

Option 2 - Minimize liquidations for LSD/LSD positions. By accounting for the correlation and volatility of all LSDs against each other, we can ensure there will be low amounts liquidated even when large LSD/LSD unmanaged positions are opened. Optimizing for such positions (LSD/LSD) will yield a significantly lower LT setting than option 1, especially if we wish to introduce more LSDs in the near future.

We believe that enabling such a high level of capital efficiency will promote AAVE as the leading protocol for LSD utilization. We observe that LSD / ETH positions are the main use case to optimize for when setting E-Mode LT, so we recommend option 1. LSD collateral vs. LSD borrowing is technically possible because of the nature of E-Mode categories, and sophisticated traders can manage them.

As LSD markets are still early, we will observe and monitor their behavior and recommend appropriate adjustments if necessary.


Source: coinmarketcap

6 Likes

Great write up. I think it’s clear that supporting cbETH on emode is a positive for Aave. What are the next steps and timeline to make this happen?

The ACI is grateful for feedback provided on this ARFC,

This proposal has now been escalated to Snapshot stage

voting starts tomorrow.

From a market risk perspective, Gauntlet supports adding cbETH to emode. As we have noted previously, an ongoing consideration is that the risk profile for cbETH may change if emode is enabled before the supply cap is reached.

Other considerations -

The slippage graphs shown above illustrate that ~40% of the supply cap, there is a meaningful price impact on DEX. If the community has a particularly conservative risk tolerance (e.g., if the community wants to discount CEX liquidity heavily), then the community may wish not to add cbETH to emode.

1 Like

We want to flag that the cbETH supply is currently at ~87% of the supply cap.

Our supply cap methodology recommends increasing the caps by 2X. However, the cbETH emode proposal is currently in Snapshot, and if passed, enabling e-mode will change the asset’s risk profile.
Therefore, we recommend prudently increasing the caps to observe the behavior of borrowers and suppliers with this potential new configuration.
As a first step, we recommend increasing the cap to 30K cbETH.

1 Like