[ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 - 08.09.2024

Governance
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Summary

A proposal to:

  • Increase weETH’s supply cap on Aave’s Ethereum deployment.
  • Increase GNO’s borrow cap on Aave’s Gnosis deployment.

Motivation

weETH (Ethereum)

weETH has reached 100% supply cap utilization on Ethereum, and its borrow cap is at 27% capacity.

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Supply Distribution

All top suppliers of weETH are looping the asset, either with WETH or itself. Thus, these positions pose little risk of liquidations, given weETH’s calculated oracle.

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Overall, ETH-correlated assets represent over 99% of the value borrowed against weETH.

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The primary blocker to increasing weETH’s supply cap has been WETH utilization. However, we have observed a decrease in utilization recently, driven by rapidly increasing WETH supply. Thus, there is now enough borrowable WETH below UOptimal to recommend increasing weETH’s supply cap.

Recommendation

Given on-chain liquidity, user behavior, and WETH’s utilization, we recommend increasing the weETH supply cap.

GNO (Gnosis)

GNO has reached 67% supply cap utilization on Gnosis, and its borrow cap is at 98% capacity.

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Supply Distribution

The two largest GNO suppliers represent 44% and 37% of total supply, respectively, with the larger of the two holding a health score of 1.76, while the smaller maintains a deposit-only position.

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This market is in isolation mode, thus the only assets borrowed against the supply are USDC and WXADAI.

Borrow Distribution

The top borrower of GNO represents 44% of the total amount borrowed, with the second largest representing 23% of the total. Both positions primarily use wstETH as collateral.

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In aggregate, wstETH represents 64.9% of the value backing GNO loans.

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Recommendation

Given on-chain liquidity and user behavior, we recommend increasing the borrow cap by 2.1K GNO.

Specification

Chain Asset Current Supply Cap Rec. Supply Cap Current Borrow Cap Rec. Borrow Cap
Ethereum weETH 660,000 720,000 200,000 -
Gnosis GNO 60,000 - 4,400 6,500

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 August 9th at 16:00 pm GMT

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this ARFC.

Copyright

Copyright and related rights waived via CC0

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The transactions have been executed successfully:

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How are risk providers thinking about the risk involved with weETH? Particularly in some of the leveraged actions being taken in their liquid vault. It would be great to get some colour on this @ChaosLabs @LlamaRisk

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@midapple we find there is limited additional risk posed from the leveraged strategies in ether.fi’s vault. The weETH market utilizes a calculated price oracle that ensures the market does not spark liquidation cascades should the secondary market price fall temporarily. Finally, we note that the community has voted in favor of increasing weETH’s cap up to maximum of 1M weETH.