Summary
A proposal to:
- Increase WETH’s supply cap on Aave’s V3 Scroll main instance.
WETH (Scroll)
WETH has reached 85% supply cap utilization on Scroll, and its borrow cap is at 86.4% capacity.
The increase in the weETH supply cap has been a success, attracting over 12,500 WETH of deposits, leading to an impressive 20% growth in one day. The borrow demand also grew by 24% over the same time.
This large influx of borrows pushed the utilization slightly over the UOptimal, which has caused the supply and borrow APY for WETH to be highly volatile. This increases the market’s attractiveness, and we expect it to drive further supply into the market.
Supply Distribution
Most of the top WETH suppliers borrow weETH or USDC. While the supply is fairly concentrated among the three biggest positions, the concentration is not significant enough to be problematic. The positions that borrow uncorrelated assets, such as USDC, maintain safe health scores over 1.3 and actively manage the positions. None of the top positions pose a significant liquidation risk.
Contrary to what seems clear from the top positions, wstETH represents the most commonly borrowed asset against WETH, representing 44.6% of the value, with USDC following with 35.75%. This shows a trend of looping wstETH borrows against WETH supply, likely due to users’ farming Scroll points. We expect this trend to shift shortly and the market utilization to trend toward USDC as the point program ended on October 19th.
Borrow Distribution
Most of the top WETH borrowers use weETH or wstETH collateral. The borrow demand is evenly distributed among the top positions. All top users use highly correlated collateral to borrow WETH; for this reason, none of the top positions pose a liquidation risk.
Overall, weETH represents 54.5% of the collateral value used to borrow WETH, while wstETH represents 41.8%.
On-chain Supply
While WETH’s on-chain supply remains scarce, the unwrapped ETH, natively bridged to Scroll, currently has a supply of 122,000 ETH. This ensures that there is sufficient supply to attract to the Aave market.
Recommendation
Given the high correlation between collateral and borrowed assets and a sufficient on-chain supply of 122,000 ETH, we recommend increasing the supply cap to 109,000 WETH and the borrow cap to 98,000 WETH. This increase is backed by Chaos Labs’ risk simulations, which consider the user’s behavior, on-chain liquidity, and price impact, ensuring that the higher cap does not introduce additional risk to the platform.
Specification
| Chain | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Scroll | WETH | 90,000 | 109,000 | 81,000 | 98,000 |
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