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 Base deployment.
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.
For Arbitrum, we recommend waiting to analyze the impact of the proposal to Optimize ETH-correlated asset parameters before considering further increasing caps.
Motivation
weETH (Ethereum)
weETH has reached its supply cap on Ethereum, while its borrow cap stands at 70% utilization.
Supply Distribution
The top suppliers are entirely composed of users looping weETH with ETH-correlated assets, putting this market at lower risk of liquidations.
The largest supplier continues to be Ether.Fi itself, who is providing an automated looping strategy.
Overall, WETH, wstETH, and weETH represent 99.3% of the value borrowed against weETH, similar to the 99.72% at the time of our last recommendation.
Borrow Distribution
The largest borrower is borrowing weETH and WETH against WETH; the rest of the top ten exhibits similar behaviors. This borrowing profile presents limited risk to the market, given the correlation between weETH and WETH.
Recommendation
Given on-chain liquidity, as well as user distribution and behavior, we recommend increasing the supply cap by 50K and the borrow cap by 10K.
weETH (Base)
weETH has reached its supply cap on Base; it is also approaching its borrow cap.
Supply Distribution
The majority of large suppliers are borrowing WETH against their weETH, with only one of the top 10 borrowing USDC. Overall, the market is at relatively low risk of large scale liquidations.
Borrow Distribution
The top borrower is borrowing weETH against itself, while the second largest is borrowing against weETH and USDC, though with enough weETH to prevent liquidation should weETH’s price rise. The borrowing positions in this market do not present major risks at this time.
Recommendation
Given on-chain liquidity and user behavior, we recommend doubling the supply and borrow caps.
Specification
| Chain | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum | weETH | 400,000 | 450,000 | 140,000 | 150,000 |
| Base | weETH | 300 | 600 | 60 | 120 |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
For transparency, we aim to execute the risk steward transaction on June 19th at 5pm GMT
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0