[ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on Aave V3 Scroll - 08.20.2024

Summary

A proposal to:

  • Increase weETH’s supply and borrow caps on Aave’s V3 Scroll deployment.
  • Increase WETH’s supply and borrow caps on Aave’s V3 Scroll deployment.

Motivation

weETH (Scroll)

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

image - 2024-08-20T131304.199

image - 2024-08-20T131306.269

Supply Distribution

Most of the top weETH are looping with WETH, putting these positions at low risk of liquidation.

image - 2024-08-20T131308.671

Overall, WETH represents 98.34% of the value borrowed against weETH.

image - 2024-08-20T131312.680

Borrow Distribution

The top weETH borrowers primarily use wstETH and WETH as collateral, with the two largest positions showing a mix of both. The largest borrowers represent a significant portion of the total market, though they have low liquidation risk due to the close correlation between the borrowed weETH and the supplied wstETH and WETH collateral.

image - 2024-08-20T131315.525

In aggregate, wstETH represents 51.87% of the value backing weETH loans.

image - 2024-08-20T131318.895

Recommendation

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

WETH (Scroll)

WETH has reached 84% supply cap utilization on Scroll, and its borrow cap is at 91% capacity.

image - 2024-08-20T131631.408

image - 2024-08-20T131634.093

Supply Distribution

Most top WETH suppliers borrow USDC, with a few also borrowing wstETH or weETH. The largest WETH supplier represents a significant portion of the total supply, though there’s still notable distribution across other wallets. The majority of large open positions have low liquidation risk due to being supply-only or borrowing stablecoins against WETH collateral, while a small number borrowing wstETH have minimal liquidation risk due to the close correlation between the assets.

image - 2024-08-20T131636.752

Overall, USDC represents 58.76% of the value borrowed against WETH.

image - 2024-08-20T131639.782

Borrow Distribution

Most top WETH borrowers use wstETH as collateral, with some also using weETH. The largest WETH borrowers represent a significant portion of the total market, with the top few positions notably larger than the rest. The largest open positions have low liquidation risk due to the close correlation between WETH and its derivatives wstETH and weETH used as collateral.

image - 2024-08-20T131643.173

In aggregate, wstETH represents 69.99% of the value backing WETH loans.

image - 2024-08-20T131646.335

Recommendation

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

Specification

Chain Asset Current Supply Cap Rec. Supply Cap Current Borrow Cap Rec. Borrow Cap
Scroll weETH 8,000 16,000 800 1,600
Scroll WETH 55,000 65,000 34,000 50,000

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 20 at 12:55-13:00 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

The transaction has been executed

Keeping scroll ETH borrowers at danger of 3-4 fig borrow APRs on yet another chain?