[ARFC] Chaos Labs Risk Stewards - Increase Supply Cap for WETH on V3 Metis - 04.08.2024

[ChaosLabs]

Summary

A proposal to increase the WETH supply cap on Aave V3’s Metis deployment.

Motivation

WETH has reached its supply cap on Metis following significant growth in deposits.

Supply Distribution

The top supplier in this market supplies 338 WETH and borrows 267 WETH, likely to farm METIS rewards. This represents nearly 30% of the supply and 83% of the borrows.

This position is at no risk of liquidation. Excluding this position, the majority of borrows against WETH collateral is in m.USDC. These positions are at risk of liquidation in the event ETH’s price drops.

However, collateral at risk does not exceed $100K until ETH drops to $3,000, a nearly 20% drop from current prices.

Borrow Distribution

WETH borrows on Metis (excluding the aforementioned WETH-WETH position) are relatively limited because the Metis market does not contain any LSTs, which drive demand for WETH borrowing from looping strategies. In fact, the second largest borrower also appears to be farming METIS rewards.

Recommendations

As per our methodology, we recommend limiting the supply caps to 50% of the on-chain circulating supply of a given token. Currently, there are 2,850 WETH on Metis; based on the on-chain liquidity and user behavior, we recommend increasing the supply cap to 1,400 WETH, while not adjusting the borrow cap.

Specification

Chain	Asset	Current Supply Cap	Recommended Supply Cap	Current Borrow Cap	Recommended Borrow Cap
Metis	WETH	1,200	1,400	720	720

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

[2theMoon]

Dear @ChaosLabs,

Firstly, I would like to extend my gratitude for summarizing my proposal. Your efforts are greatly appreciated.

Upon reflection, I feel compelled to share my personal commitment to the success of Metis. I am enthusiastic about contributing 600 ETH to the platform as soon as the cap is increased. This infusion would significantly bolster on-chain circulation, adding approximately 3450 to the network.

Moreover, I urge reconsideration of the recommended supply cap in light of two crucial factors. Firstly, Metis currently lacks alternative collateral tokens aside from stablecoins. This creates an imbalanced market for liquidity providers of stablecoins, potentially exposing them to unfavorable rates, particularly about the fact that the rate can not go above 6%. This scenario is inequitable compared to other chains.

Given these considerations, I kindly request a review of the recommendation, advocating for an increase in the supply cap to at least 2000 ETH. This adjustment would not only align with the platform’s growth objectives but also ensure fair and competitive conditions for liquidity providers.

[ChaosLabs]

The transaction for this proposal has now been executed

[ChaosLabs]

Hi @2theMoon. The recommendations were derived given current liquidity conditions on Metis and the current usage on Aave. Should onchain and DEX liquidity improve, we are prepared to make further recommendations and increase the caps should the conditions and our methodologies permit.

Regarding alternative collateral assets besides stablecoins, we have previously supported enabling METIS as collateral in isolation mode with a conservative launch. This proposal has passed the ARFC stage and should be ready for an AIP vote.

[2theMoon]

Hi @ChaosLabs
thank you for quickly approving the decision of increasing the burrow cap to 1400.
I have deposited additionally 200 more ETH and reached the new cap.

I currently have 20 Additional ETH on Metis chain and 311 ETH in the aave v2 Protocol on Ethereum
which I intend to deposit.

discordtag-2themoon6691.eth | Address...

I would kindly ask to purpose to another Increase to at least 1800 ETH as supply cap and calculate the 311 ETH which I will bridge as part of the liqudity on the chain as i do not have the possibility to bridge it now without risking a liquidation on aave ETH

[ChaosLabs]

Hi @2theMoon, we are reevaluating the potential for an additional increase following the most recent proposal and considering the migration of the position from V2 Ethereum. We will update the forums with a follow-up proposal should we recommend an additional increase. Please note that the earliest this could be done is April 14th, due to a 5-day timelock between Risk Steward transactions.