Summary
LLamaRisk supports the proposal to increase the borrowing cap of wstETH on the Aave V3 LiDo instance. The incoming listing of ezETH as collateral on the Aave V3 LiDo instance will enable an ezETH/wstETH looping use-case. Increasing the wstETH borrow cap from 100 (essentially 0) to 14,000 is necessary to allow this use case.
ezETH/wstETH E-mode
As a refresher, here are the parameters proposed by @ChaosLabs for the ezETH-wstETH E-mode once ezETH is onboarded:
| Parameter | Value | Value |
|---|---|---|
| Asset | ezETH | wstETH |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 93% | 93% |
| Liquidation Threshold | 95% | 95% |
| Liquidation Penalty | 1.00% | 1.00% |
Source: ezETH LiDo ARFC, proposed on October 14th, 2024
The proposed increase in borrow cap from 100 wstETH to 14,000 wstETH aligns with the proposed 15,000 supply cap for ezETH and its 93% LTV. The current wstETH supply cap of 650k at 20% usage provides ample room for that 14,000 increase in borrow cap.
Source: wstETH LiDo supply utilization, October 21st, 2024
Potential for liquidity incentive mining
We agree with @ChaosLabs’s assessment that the current wstETH/wstETH looping use-case won’t be profitable and disappear once ezETH is onboarded on the Aave V3 LiDo instance as collateral. The demand for wstETH borrowing will increase the borrowing rate to unprofitable levels for mining liquidity incentives.
Regardless, a separate proposal for which we are favorable will soon disable the wstETH/wsETH and WETH/WETH looping use-cases, hence preventing liquidity incentive mining all-together.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.