Overview
Chaos Labs supports listing rsETH on Aave V3 Ethereum as part of the community’s strategy to increase the offering of Aave protocol with more LST/LRT assets. Following is our analysis and risk parameter recommendations for the initial listing.
Note: The following analysis is conducted solely from a market risk viewpoint, excluding centralization and third-party risk considerations. If the community aims to reduce exposure to rsETH, adopting more conservative supply and borrow caps should be considered.
Liquidity and Market Cap
The amount of ETH restaked with Kelp DAO has grown rapidly, from 65K ETH in mid-January to 255K ETH today. Note that withdrawals were opened on May 4, 2024, which led to a 10K ETH decrease in TVL.
Currently, users may stake using ETHx, WETH, stETH, or sfrxETH. Rewards are reflected in the price of the token rather than rebasing. Since inception, it has registered $6.67M in average daily volume.
On Ethereum, its liquidity is concentrated on Balancer V2 ($38M TVL, paired with WETH) and Uniswap V3 ($14M TVL, paired with WETH).
rsETH / ETH Volatility
Liquidation Threshold
Considering the volatility and the correlation of rsETH to ETH, we recommend setting the LT to 75%, mirroring weETH on Ethereum V3.
Supply Cap, Borrow Cap, and Liquidation Bonus
Chaos Labs’ approach to initial supply caps is generally proposed through setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty (7.5%) price impact, which leads us to recommend a starting supply cap of 8,000 rsETH.
Based on our observations, the utilization rate for LRTs and LSTs has been low due to additional borrowing costs. Therefore, we have taken a conservative approach and recommend a borrow cap of 800 rsETH. However, if there is a significant increase in demand and utilization, perhaps due to external incentives, we will reassess the caps according to the utilization pattern.
IR Curve Parameters
We recommend aligning the interest rate parameters with those of weETH on Ethereum to ensure consistency across similar assets on Aave v3.
Oracle Setting and E-mode
Following analysis, we find that rsETH has consistently traded below the reward-adjusted ETH price implied by its exchange rate. This persistent discount has been punctuated by periods of a widening discount, reaching nearly 3% in March and breaching 2% in April. The limited history since withdrawals were enabled shows that the discount remains, albeit with less severe spikes.
Given these factors, we first recommend utilizing the market price when listing this asset and not a calculated price feed. Additionally, we do not recommend listing this asset in E-Mode, given its tendency to face wide discounts, which could spark liquidation cascades in a highly leveraged market using a market oracle price. Below are our updated specifications.
Recommendations
Following the above analysis, we recommend listing rsETH with the following parameter settings:
| Parameter | Value |
|---|---|
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap (rsETH) | 8,000 |
| Borrow Cap (rsETH) | 800 |
| Debt Ceiling | - |
| LTV | 72.50% |
| LT | 75.00% |
| Liquidation Bonus | 7.50% |
| Liquidation Protocol Fee | 10.00% |
| Variable Base | 0.0% |
| Variable Slope1 | 7.00% |
| Variable Slope2 | 300.00% |
| Uoptimal | 45.00% |
| Reserve Factor | 15.00% |
| Stable Borrowing | Disabled |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowed in Isolation | No |
| E-Mode Category | N/A |
CAPO recommendations:
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 8.75% | monthly | 7 days |