[ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Cap for weETH on V3 Ethereum and Arbitrum - 05.24.2024

Summary

A proposal to:

  • Increase weETH’s supply and borrow caps on Aave V3’s Ethereum deployment
  • Increase weETH’s supply and borrow caps on Aave V3’s Arbitrum deployment

Motivation

Following the community decision signaling a positive sentiment towards more aggressive exposure to weETH, we are prepared to facilitate additional cap increases via the caps steward.

weETH (Ethereum)

weETH has reached its supply cap on Ethereum, while its borrow cap stands at 96% utilization.

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Supply Distribution

All but two of the top 10 suppliers is looping weETH, either with WETH or with itself. These positions are at limited risk of liquidation given the calculated oracle for weETH.

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Overall, WETH and weETH represent 98.6% of the value borrowed against weETH.

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Borrow Distribution

The largest borrower is borrowing against weETH against itself; the rest of the top 10 is all looping with a combination of wstETH, weETH, and WETH.

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Recommendation

Given on-chain liquidity, as well as user distribution and behavior, we recommend increasing the supply cap by 50,000 weETH and doubling the borrow cap.

weETH (Arbitrum)

Motivation

The Arbitrum weETH market reached full supply and borrow utilization rapidly after the last cap increase.

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Supply Distribution

As above, all of the 10 largest suppliers are looping weETH with ETH-correlated assets, putting this market at relatively low risk of large scale liquidations.

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Overall, weETH, wstETH, and WETH represent 97.8% of the value borrowed against weETH.

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Borrow Distribution

The top collateral asset against weETH is weETH itself, representing 95% of collateral. This puts weETH borrow positions at a relatively low risk of liquidation.

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Recommendation

Given on-chain liquidity and user distribution, we recommend increasing the supply cap by 50% and doubling the borrow cap.

Specification

Chain Asset Current Supply Cap Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
Ethereum weETH 200,000 250,000 29,500 59,000
Arbitrum weETH 32,000 48,000 3,200 6,400

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

2 Likes

This is a great update to the supply and borrow caps on Aave V3’s Ethereum/Arbitrum money market, and one that is indeed welcomed given the popularity of EtherFi and the demand of the weETH asset.

One aspect of the new proposal to consider revising, however, is the ratio of borrow cap to supply cap. Specifically, the current ratio for Arbitrum is 10% borrowability of the supply cap, but the new proposal would increase that to 13.3%. This may be unfavorable to the many current weETH lenders on Arbitrum (32K worth of weETH) who chose to deposit weETH on Aave to maintain their generation of EigenLayer points. This new proposed ratio would dilute their rate of points earning. This could be remedied quite easily: simply maintain the new borrow-to-supply cap ratio at 10% (so current lenders are only diluted 90%). Therefore, the new proposal may be revised in one of two ways:

1) Increase the recommended Arbitrum supply cap to 64,000 (and keep recommended borrow cap the same at 6,400)

or

2) Increase the recommended Arbitrum borrow cap to just 4,800 (and keep recommended supply cap the same at 48,000)

The transactions for this proposal have now been executed.