[ARFC] Chaos Labs Risk Stewards - Increase Supply and Borrow Caps on V3 Arbitrum - 03.30.2024

wstETH and WETH on Aave V3 on Arbitrum

Summary

A proposal to:

  • increase wstETH supply cap on Arbitrum
  • increase WETH supply and borrow cap on Arbitrum

Motivation

The following recommendations were made using Chaos’ supply and borrow cap methodologies after analyzing user positions for the asset.

wstETH

Untitled - 2024-03-30T011749.593

The supply and borrow cap utilizations for wstETH on Arbitrum V3 are currently at 88% and 12%, respectively. Supply has grown consistently since February, while borrows remain low.

Untitled - 2024-03-30T011751.365

The community has previously agreed to allow maximum supply caps for LSTs at 75% of circulating supply on a given chain, which would equate to 69K wstETH on Arbitrum. Given this, we recommend the supply cap be increased to 69K wstETH.

Supply Distribution

All of the top wstETH suppliers have borrowed only ETH against their collateral, putting them at low risk of liquidation despite low health scores.

Untitled - 2024-03-30T011753.095

$133M of the $153M borrowed against wstETH is ETH.

Untitled - 2024-03-30T011754.657

Borrow Distribution

Borrows of wstETH are relatively small and well distributed.

Untitled - 2024-03-30T011756.602

Given borrow utilization, there is no need to increase the borrow cap at this point in time.

Recommendation

Considering the current liquidity and user positions on Arbitrum, we recommend increasing the supply cap to 69K wstETH.

WETH

The supply and borrow cap utilizations for WETH on Arbitrum V3 are currently at 85% and 79%, respectively.

Supply Distribution

The top suppliers of WETH are well-distributed

Untitled - 2024-03-30T011800.479
and in relatively good health.

Stablecoins are the most common assets borrowed against WETH collateral, putting the positions at risk of liquidation should WETH’s price decrease. However, given WETH’s liquidity, liquidations would not pose a risk to the protocol.

Untitled - 2024-03-30T011802.343

Borrow Distribution

Large borrows of WETH are almost exclusively against wstETH, with users looping the assets. These positions are at a relatively low risk of liquidation, as mentioned above.

Untitled - 2024-03-30T011804.269

WBTC, USDC, and USDT are also used as collateral to borrow WETH.

Untitled - 2024-03-30T011806.125

Recommendation

Considering the current liquidity and user positions on Arbitrum, we recommend increasing the supply and borrow caps by 20% each to 84K WETH and 72K, respectively.

Specification

Chain Asset Current Supply Cap Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
Arbitrum wstETH 60,000 69,000 2,400 No Change
Arbitrum WETH 70,000 84,000 60,000 72,000

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

1 Like

The transaction for this proposal has now been executed.