[ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Cap for weETH on V3 Ethereum, Arbitrum and Base- 06.10.2024

Summary

A proposal to:

  • Increase weETH’s supply and borrow cap on Aave V3’s Ethereum deployment
  • Increase weETH’s borrow caps on Aave V3’s Arbitrum deployment
  • Increase weETH’s supply and borrow caps on Aave V3’s Base 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 85% utilization.

Supply Distribution

All 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.

Overall, WETH and weETH represent 99% of the value borrowed against weETH.

Borrow Distribution

The largest borrower is borrowing against a combination of WETH and wstETH; the rest of the top 10 exhibit similar behavior, borrowing primarily against weETH collateral

Recommendation

Given on-chain liquidity, as well as user distribution and behavior, we recommend increasing the supply cap by 25k and the borrow cap by 40k, representing 35% of the supply cap.

weETH (Arbitrum)

Motivation

The Arbitrum weETH market has reached full supply and borrow utilization following a recent increase in both caps.

Supply Distribution

All of the ten largest suppliers are looping weETH with ETH-correlated assets, putting this market at a relatively low risk of large-scale liquidations.

Overall, weETH, wstETH, and WETH represent 97.7% of the value borrowed against weETH.

Borrow Distribution

The top collateral asset against weETH is weETH itself, representing 97% of total collateral. This puts weETH borrow positions at a relatively low risk of liquidation.

Recommendation

Given current user distribution, we recommend increasing the borrow cap to 25k, representing 35% of the supply cap

weETH (Base)

Motivation

The Base weETH market has reached full supply and borrow utilization following a recent increase in both caps.

Supply Distribution

Four of the five largest suppliers, representing nearly 99% of supplied weETH are looping weETH with ETH-correlated assets, putting this market at relatively low risk of large-scale liquidations.

Overall, weETH, and WETH represent 90.3% of the value borrowed against weETH.

Borrow Distribution

A single borrower currently accounts for over 96% of the total weETH borrows, borrowing solely against weETH collateral.

Recommendation

Given current user distribution, 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 375,000 400,000 100,000 140,000
Arbitrum weETH 72,000 No Change 12,800 25,000
Base weETH 150 300 30 60

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 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

1 Like

What is the motive of keeping the supply cap the same for Arbitrum and increasing borrow cap more than the supply cap on Ethereum?

Previously caps were simply doubled (due to risk steward process limits) but now there is a big shift, while the explanations have remained the same.

Clearly there is a move towards getting more profit for Aave. Why is this not reflected in this ARFC?

Thanks for the update!

I’m the cofounder of Swaap Labs. We just announced the deployment of a vault that automates a recursive weETH strategy on Aave on L1, allowing users to LP when the caps are opened.

We understand that the community has voted for a total supply of 1m of weETH across the Aave ecosystem.

On which timeline is it expected that the deployment fully occurs?

1 Like

We do not recommend increasing the weETH supply on Arbitrum, as it already accounts for nearly 60% of the total circulating supply on Arbitrum. In addition, increasing the supply further could lead to higher utilization of WETH, increasing its borrow rates and hurting long-term Aave users who are looping against wstETH.

Regarding the borrow caps - the recommendation is to increase the cap such that users could borrow up to the community-approved UOptimal

2 Likes

I fear that this change might in fact lead to the higher utilization of WETH. Looping weETH will become much more expensive, so many might switch their borrows over to WETH instead of weETH.

But we will see how it develops once this change goes through.

The transactions for this proposal have now been executed.

why is it executed without vote and Payload process

Because it’s being done through the risk steward process which has been voted on and approved by the DAO.

1 Like