[ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 Arbitrum - 05.21.2024

Summary

A proposal to increase the following supply and borrow caps on Aave V3’s Arbitrum deployment:

  • WETH
  • USDC
  • WBTC

Motivation

WETH

Following a surge in new deposits, WETH has reached 93% supply cap utilization and 90% borrow cap utilization.

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Supply Distribution

The largest supplier has deposited 18.7% of the total WETH in this market and is borrowing $33M USDC against their collateral.

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This supplier is a dHedge strategy, which has seen rapid growth in TVL following its launch on Arbitrum.

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It aims to achieve 3x leverage on ETH using leverage on Aave and has been consistently rebalancing its position to reach the desired leverage.

Borrow Distribution

The largest borrower is borrowing $68.5M WETH against wstETH collateral in a looping strategy, putting this position at relatively low risk of liquidation.

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Recommendation

Given on-chain liquidity and user distribution, we recommend increasing the supply and borrow caps to 100K and 90K, respectively.

USDC

USDC is approaching its supply and borrow caps, again following a surge in activity on Arbitrum.

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Supply Distribution

Supply is well distributed, with the largest supplier borrowing ARB against their USDC collateral. Overall, borrows against USDC are relatively limited, putting this market at lower risk of large-scale liquidations.

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Borrow Distribution

The largest borrower is the dHedge 3x ETH strategy mentioned above, while the second largest is the dHedge 3x BTC strategy discussed below.

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Recommendation

Given on-chain liquidity and user distribution, we recommend increasing the supply and borrow caps.

WBTC

WBTC is approaching its supply cap following rapid inflows into the dHedge 3x BTC strategy and accompanying deposits in Aave.

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Supply Distribution

The largest supplier of WBTC is the dHedge strategy, with $45M WBTC deposited and $27M USDC borrowed.

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This strategy’s TVL grew rapidly over the past three days but has leveled off over the last 12 hours.

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Recommendation

Given on-chain liquidity and user distribution, we recommend increasing the supply and borrow caps.

Specification

Chain Asset Current Supply Cap Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
Arbitrum WETH 84,000 100,000 72,000 90,000
Arbitrum USDC 200,000,000 300,000,000 180,000,000 270,000,000
Arbitrum WBTC 4,200 5,000 1,100 No Change

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

The transaction for this proposal has now been executed.

Thank you for the prompt response.

Thanks for quick action on this.