Summary
A proposal to:
- Increase BTC.b’s supply cap on Aave’s V3 Avalanche deployment.
- Increase sAVAX’s supply cap on Aave’s V3 Avalanche deployment.
- Increase WETH’s supply and borrow caps on Aave’s V3 Arbitrum deployment.
BTC.b (Avalanche)
BTC.b has reached 99% supply cap utilization on Avalanche, and its borrow cap is at 28% capacity.
Supply Distribution
Most of the top BTC.b suppliers use their holdings to borrow WAVAX or USDC. The largest wallet holds a significantly larger position than other users in the market, accounting for approximately 20% of the total deposited supply. These top positions generally maintain safe health scores despite borrowing stablecoins and other uncorrelated assets, indicating minimal liquidation risk.
Only one wallet among the top ten is at risk of liquidation, with a collateral of 66 BTC.b and a health score of 1.22, but BTC.b’s DEX liquidity is sufficient to absorb this potential liquidation with a Price Impact within the Liquidation Bonus.
Overall, stablecoins represent 59.54%, and WAVAX represents 27.38% of the value borrowed against wstETH.
Recommendation
Given the limited on-chain supply of BTC.b, with the current supply cap representing over 50%, we recommend raising the supply cap to 4,000 BTC.b. This increase would accommodate the ongoing demand, user behavior, and DEX liquidity, allowing Aave to attract more BTC.b deposits without raising the protocol’s risk.
sAVAX (Avalanche)
sAVAX has reached 89% supply cap utilization on Avalanche. Showing a slow but steady growth in deposits.
Supply Distribution
Most of the top sAVAX suppliers use their holdings to borrow WAVAX to leverage the sAVAX yield. The distribution is evenly distributed among the top suppliers, with their health scores being safe relative to the high correlation of the assets used. The market doesn’t show any significant liquidation risk.
Overall, WAVAX represents 96.99% of the value borrowed against sAVAX.
Recommendation
Considering the low volatility risk from the most common use case of looping correlated assets, along with steady market growth and abundant on-chain liquidity, we recommend increasing the supply cap to 3,000,000 sAVAX. This recommendation is based on a linear growth forecast to meet the expected demand over the next three months.
WETH (Arbitrum)
WETH has reached 81% supply cap utilization on Arbitrum, and its borrow cap is at 80% capacity.
Supply Distribution
Most of the top WETH depositors use it as collateral to borrow USDC. No single entity represents a disproportionately large share of the market as the supply is evenly distributed among top holders. While the most commonly borrowed asset is not correlated to the collateral, the positions maintain safe health score and pose little liquidation risk.
Overall stablecoins represent 80.65% of the assets borrowed against WETH collateral.
Borrow Distribution
Most of the top WETH borrowers use their weETH as collateral to leverage weETH yields. The demand for WETH is evenly distributed among the top borrowers, with no single entity borrowing a disproportionately large share. Due to the strong correlation between the collateral (weETH) and the borrowed asset (WETH), none of the top positions present a significant risk of liquidation.
Overall, weETH represents 73.30% of the collateral value used to borrow WETH.
Recommendation
We recommend increasing the supply cap to 170,000 WETH and the borrow cap to 153,000 WETH. The supply cap is based on Chaos Labs’ risk simulations, which consider user behavior, on-chain liquidity, DEX liquidity, and asset volatility. The borrow cap is designed to target a market utilization of 90%.
Specification
| Chain | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Avalanche | BTC.b | 3,000 | 4,000 | 900 | - |
| Avalanche | sAVAX | 2,200,000 | 3,000,000 | - | - |
| Arbitrum | WETH | 140,000 | 170,000 | 120,000 | 153,000 |
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