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 increase cbETH supply cap on the Aave V3 Ethereum market.
Abstract
This ARFC proposes to increase the CbETH Supply cap to 30k CbETH to reflect market demand for depositing this asset.
Motivation
cbETH is currently at ~87% of its supply cap on Aave V3.
Allowing an increase in this supply cap will allow new Aave users to use Aave V3 & allow current users to increase the size of their positions.
The new proposed cap is set at a level that allows the market to find this new equilibrium while maintaining a conservative approach.
Additionally, it represents a 50% increase from the current cap, making this ARFC compliant with the “direct-to-AIP” framework and enabling a rapid response to the current high demand for cbETH on Aave.
From a market risk perspective, Gauntlet proposes to wait until emode is enabled and active before raising supply caps to 30k. If the community believes the current difference between the cap and supply is insufficient to test new borrower behavior, then Gauntlet supports raising the supply caps to 25k.
Gauntlet would like to stress that the risk profile of cbETH and the distribution of debt it supports will change when emode is activated. 90% of the debt is WETH currently in “emode” style borrowing, but with lower LT. It is important to understand what percentage of cbETH will be supplied in emode vs. non-emode because of the below risk analysis findings:
Insolvency Analysis
For non-emode, our models show that insolvencies occur if cbETH drops 25% (in USD value). For emode-borrowing, our models show that insolvencies occur if cbETH diverges from ETH by 7%. As such, the risk profiles of non-emode to e-mode differ. Thus, it will be important to understand what percentage of cbETH will be supplied in emode vs. non-emode when emode is enabled.
Is there a way to quantify the benefits / risks of having a higher supply cap when/if emode is enabled? Could it be beneficial to have a higher ceiling to accommodate onboarding emode deposits?
Hi all, we’ve decided to vote NO for this proposal taking into feedback both Gauntlet and Chaos Labs’ analysis. While we understand the need to increase the Supply Cap for cbETH, we think it might be better to do so in a more controlled manner, especially since it is a relatively ‘new’ asset and it would be prudent to be a little more conservative and increase the cap to 25k instead of 30k. Our analysis, posted on our Delegate Platform as well, is below:
Both Gauntlet and Chaos Labs took considerations of the fact that cbETH is going to be included in the eMode, but they have different targets for setting the supply cap. Chaos Labs initially would like to raise the supply cap of cbETH by 2X to 40k, but after considering the impact of enabling eMode for cbETH, they suggested raising the cap to 30k. Gauntlet, on the other hand, suggests that the community should wait to see what percentage of cbETH will be supplied in eMode vs. non-eMode when eMode is enabled before making adjustment to the supply cap. Given the fact that the risk profiles of cbETH are very different under non-eMode and eMode, we suggest waiting until there is more information and data regarding cbETH after eMode is executed and then adjusting the supply cap accordingly.
Hello @lbsblockchain and thanks for sharing your motivation for the vote.
The ACI has another opinion on the effect of increased supply caps & emode on Aave on the cbETH asset.
Why do people use emode? To leverage long cbETH exposure.
Why do they do this? To increase their staking reward and earn the current cbETH peg discount that is expected to be smaller (or disappear) after the shanghai upgrade.
A higher supply cap for cbETH allows more people & volume to long cbETH & helps cbETH peg & stability by buying cbETH with ETH on secondary liquidity.
Because of tight borrow caps, the opposite (short cbETH) is an asymmetric bet that cost staking yield of cbETH + borrow cost of cbETH (with painful interestRate Strategy parameters) for limited total volume & global impact.
I may seem counter-intuitive, but, to a limit, increasing the cbETH supply cap actually helps cbETH peg & make AAVE both more secure & profitable.
Thanks @MarcZeller for bring forward this important discussion. We voted no on this proposal because we think the potential gains to Aave from the supply cap increase is indirect and likely small in magnitude, while the potential losses, as outlined by Gauntlet, is more direct and perhaps large. More specifically,
cbETH’s supply is >1.1M, a 10k increase in supply on Aave would likely not make a significant impact on the asset’s price on exchange. We would love to see correlational or causal evidence of how activity on Aave effects asset price in the overall market.
If someone is long on an asset, ie., thinks its price will increase or be stable, they will not start thinking the opposite just because they cannot execute a long strategy at the moment. In other words, we don’t think they will decide to take a short position due to the supply cap.