Summary
Increase the supply cap on GHO in Arbitrum V3 to mitigate looping.
GHO (Arbitrum)
GHO supply cap is currently at 100% utilization, while the borrow cap is at 61% utilization.
Supply Distribution
Out of the top 50 GHO suppliers, 12 are currently borrowing GHO. While some of these positions provide additional collateral in the form of USDC, most of the top positions are supply-only. However, the biggest supplier represents a significant portion of the GHO supply and the borrowing on Arbitrum.
Borrow Distribution
The situation of the top GHO borrowers is similar. The most common collateral assets are GHO and USDC. Most GHO borrowers redeposited the borrowed asset in the market’s supply side.
Looping
After analyzing the top 50 GHO suppliers and borrowers, we could detect roughly 50% of the supply and 86% of the borrow demand coming from looping positions.
Since GHO is not a collateral asset on Arbitrum, to loop, the users need to provide an equal amount in USDC or other assets to use as collateral for the GHO borrowing.
After the recent borrow cap raise on GHO, the asset received a minimal increase in borrow interest.
We can deduce that most of the demand is still derived from looping behavior.
Recommendation
We recommend increasing the supply cap to 16,000,000 GHO to allocate the incentives currently active on Arbitrum’s GHO supply more efficiently.
Chaos Labs will closely monitor the market. If the looping continues and/or increases, we will recommend increasing the Reserve Factor and reducing the borrow cap.
Specification
| Chain | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Arbitrum | GHO | 10,000,000 | 16,000,000 | 9,000,000 | - |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0