Summary
A proposal to:
- Increase USDC’s supply and borrow cap on Aave’s V3 Base main instance.
- Increase WETH’s supply and borrow cap on Aave’s V3 Base main instance.
- Increase weETH’s supply cap on Aave’s V3 Base main instance.
USDC (Base)
USDC has reached 81% supply cap utilization on Base, and its borrow cap is at 77% capacity.
Supply Distribution
Most of the top USDC suppliers maintain supply-only positions, except for the biggest position, which uses USDC collateral to borrow WETH. The user’s intent is presumably to short WETH as the position has been leveraged through looping.
With a health score of 1.05, the position is at serious risk of liquidation. However, given the deep liquidity of the assets involved, any liquidation triggered would likely be executed efficiently, minimizing potential market impact.
Overall, WETH represents 95% of the value borrowed against USDC. The top position represents an outsized portion of this value.
Borrow Distribution
The majority of the top USDC borrowers use WETH as collateral, with only one position using wstETH collateral. While three of these top positions maintain a health score of 1.2 or lower, the asset’s deep liquidity ensures a safe liquidation.
Overall, WETH represents 82% of collateral value used to borrow USDC.
Recommendation
Given the highly liquid and varied collateral being used to borrow USDC, we recommend increasing the supply cap to 120,000,000 USDC and the borrow cap to 108,000,000 USDC. 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.
WETH (Base)
WETH has reached 77% supply cap utilization on Base, and its borrow cap is at 83% capacity.
Supply Distribution
Most of the top WETH suppliers use it as collateral to borrow USDC. The top biggest positions represent a significant portion of the supply. The remaining positions are supply only, and for that reason, they don’t pose any additional risk. The positions with USDC collateral have been covered in the previous paragraph and do not pose any serious risk, thanks to the deep liquidation available for the asset.
Overall, USDC represents 90.5% of the value borrowed against WETH.
Borrow Distribution
The majority of the top WETH borrowers use weETH as collateral in order to leverage the staking yield of weETH. While the biggest position represents a significant portion of the supply, the high correlation between the borrowed and supplied assets significantly minimizes the liquidation risk. The second biggest position uses USDC collateral to borrow WETH, and it has been covered in the previous paragraph. Thanks to the liquidity of the assets used, it does not pose a significant risk.
Overall, weETH represents 76% of collateral value used to borrow WETH.
Recommendation
Given the high correlation between the borrow and supply assets, and the deep liquidity available, we recommend increasing the supply cap to 90,000 WETH and the borrow cap to 72,000 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.
weETH (Base)
weETH has reached 100% supply cap utilization on Base, and its borrow cap is at 8% capacity.
Supply Distribution
Most of the top weETH suppliers use it as collateral to borrow WETH. The top position represents a significant portion of the supply, which indicates high supply concentration. But thanks to the correlation between the collateral and borrow assets, none of these positions poses a significant liquidation risk.
Overall, WETH represents 95.6% of the value borrowed against weETH.
Recommendation
Given the high correlation between the borrow and supply assets, but the limited on-chain supply of weETH, we recommend increasing the supply cap to 28,600 weETH. 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 |
|---|---|---|---|---|---|
| Base | USDC | 60,000,000 | 120,000,000 | 54,000,000 | 108,000,000 |
| Base | WETH | 45,000 | 90,000 | 36,000 | 72,000 |
| Base | weETH | 25,000 | 28,600 | 9,000 | - |
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