Summary
LlamaRisk supports this proposal, which addresses two key issues:
- wstETH Borrow Cap Increase: The upcoming introduction of ezETH collateral on Aave V3 Lido requires raising the wstETH borrow cap from its current 100 wstETH limit, which is fully utilized.
- Use Case Restriction: The current cap utilization is due to users leveraging the wstETH/wstETH strategy for awstETH rewards. The proposal aims to restrict the WETH/wstETH use-case while increasing the borrow cap.
These changes will prevent the expanded borrowing capacity from being consumed by existing reward-farming strategies, reserving it for the intended ezETH/wstETH leveraged-looping strategy.
Current Usage
The wstETH/wstETH and WETH/WETH use cases are currently employed to farm liquidity incentives. This strategy is profitable because the borrowing rate is lower than the supply rate plus the liquidity incentive. The 100 wstETH borrow cap limits these extractive use cases and the more profitable wstETH/WETH looping use case for WETH.
Source: wstETH borrow usage on the Aave V3 Lido instance, October 21st, 2024
Current WETH/WETH e-mode borrows amount to $25.4m, while wstETH/wstETH e-mode borrows amount to $284.83m.
Proposal Effect
Allowing wstETH as collateral only and WETH as borrowable only in the wstETH-WETH E-mode will prevent farming of incentives on both wstETH and WETH deposits. The increase in the wstETH borrow cap will be dedicated solely to the future ezETH/wstETH leveraged-looping use-case.
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.