Summary
A proposal to:
- Increase weETH’s supply cap on Aave’s V3 Ethereum deployment.
- Increase weETH’s supply cap on Aave’s V3 Scroll deployment.
- Increase weETH’s supply cap on Aave’s V3 Base deployment.
- Increase weETH’s supply cap on Aave’s V3 Arbitrum deployment.
weETH (Ethereum)
weETH has reached 100% supply cap utilization on Ethereum, and its borrow cap is at 11% capacity. The weETH supply quickly reaches its new cap when space is available.
Supply Distribution
Most of the top weETH suppliers borrow WETH. No position represents an outsized portion of the total supply, and the supply is evenly distributed among the top holders. Given the high correlation between the borrowed assets and the collateral, the top wallets pose little liquidation risk.
Overall, WETH represents 92.25% of the value borrowed against weETH.
Liquidity
The on-chain supply of weETH on Ethereum recently grew to over 1,585,000. While Aave represents a significant portion of this supply, the high correlation of the borrowed assets ensures that the market is safe from liquidations.
The deposits of WETH into Aave v3 Ethereum main pool also grew significantly, with over a 33% growth over the last 3 months to reach 1,280,000 WETH. This ensures that the constant demand for WETH from weETH suppliers is quickly met.
Recommendation
Given that the underlying interest rate for weETH is close to the borrow rate for WETH on Aave, we do not anticipate that weETH suppliers will borrow WETH at rates exceeding 3%. Consequently, an increase in the weETH supply cap is unlikely to push the utilization of the WETH pool beyond the current 90% target. It is important to highlight that the primary demand for WETH stems from the opportunity to borrow stablecoins at favorable rates, thanks to the interest earned on the asset.
Therefore, we recommend raising the weETH supply cap to 1,400,000. The growth in on-chain weETH supply supports this proposal and aims to boost further supply on-chain while also marginally increasing the demand for WETH on Aave.
weETH (Scroll)
weETH has reached 100% supply cap utilization on Scroll, and its borrow cap is at 66% capacity. The weETH supply quickly reaches its new cap when space is available.
Supply Distribution
Most of the top weETH suppliers borrow WETH. The biggest wallets represent an outsized portion of the total supply, but given the high correlation between the borrowed assets and the collateral, none of the top wallets pose little liquidation risk.
Overall, WETH represents 96% of the value borrowed against weETH.
Liquidity
The on-chain supply of weETH on Scroll recently grew to over 52,000. While Aave represents a significant portion of this supply, the high correlation of the borrowed assets ensures that the market is safe from liquidations.
The deposits of WETH into Aave v3 Scroll main pool also grew significantly, with over a 70% growth over the last 3 months to reach 64,000 WETH. This ensures that the constant demand for WETH from weETH suppliers is quickly met.
Recommendation
Given that the underlying interest rate for weETH is close to the borrow rate for WETH on Aave, we do not anticipate that weETH suppliers will borrow WETH at rates exceeding 3%. Consequently, an increase in the weETH supply cap is unlikely to push the utilization of the WETH pool beyond the current 90% target. It is important to highlight that the primary demand for WETH stems from the opportunity to borrow stablecoins at favorable rates, thanks to the interest earned on the asset.
Therefore, we recommend raising the weETH supply cap to 46,500. The growth in on-chain weETH supply supports this proposal and aims to boost further supply on-chain while also marginally increasing the demand for WETH on Aave.
weETH (Base)
weETH has reached 100% supply cap utilization on Base, and its borrow cap is at 11% capacity. The weETH supply quickly reaches its new cap when space is available.
Supply Distribution
Most of the top weETH suppliers borrow WETH. The biggest wallets represent an outsized portion of the total supply. Given the high correlation between the borrowed assets and the collateral, the top wallets pose little liquidation risk.
Overall, WETH represents 96.5% of the value borrowed against weETH.
Liquidity
The on-chain supply of weETH on Base recently grew to over 28,000. While Aave represents a significant portion of this supply, the high correlation of the borrowed assets ensures that the market is safe from liquidations.
The deposits of WETH into Aave v3 Base main pool also grew significantly, with over a 70% growth over the last 3 months to reach 30,500 WETH. This ensures that the constant demand for WETH from weETH suppliers is quickly met.
Recommendation
Given that the underlying interest rate for weETH is close to the borrow rate for WETH on Aave, we do not anticipate that weETH suppliers will borrow WETH at rates exceeding 3%. Consequently, an increase in the weETH supply cap is unlikely to push the utilization of the WETH pool beyond the current 90% target. It is important to highlight that the primary demand for WETH stems from the opportunity to borrow stablecoins at favorable rates, thanks to the interest earned on the asset.
Therefore, we recommend raising the weETH supply cap to 25,200. The growth in on-chain weETH supply supports this proposal and aims to boost further supply on-chain while also marginally increasing the demand for WETH on Aave.
weETH (Arbitrum)
weETH has reached 100% supply cap utilization on Arbitrum, and its borrow cap is at 14% capacity. The weETH supply quickly reaches its new cap when space is available.
Supply Distribution
Most of the top weETH suppliers borrow WETH. No position represents an outsized portion of the total supply, and the supply is evenly distributed among the top holders. Given the high correlation between the borrowed assets and the collateral, the top wallets pose little liquidation risk.
Overall, WETH represents 94.60% of the value borrowed against weETH.
Liquidity
The on-chain supply of weETH on Arbitrum is stagnant at around 107,000. While Aave represents a significant portion of this supply, the high correlation of the borrowed assets ensures that the market is safe from liquidations. This supply cap increase can further drive additional supply on the chain.
The deposits of WETH into Aave v3 Arbitrum are also stagnant, with the supply remaining largely unchanged in the last 3 months at around 112,000 WETH. This supply cap increase can further drive additional WETH supply on Aave.
Recommendation
Given that the underlying interest rate for weETH is close to the borrow rate for WETH on Aave, we do not anticipate that weETH suppliers will borrow WETH at rates exceeding 3%. Consequently, an increase in the weETH supply cap is unlikely to push the utilization of the WETH pool beyond the current 90% target. It is important to highlight that the primary demand for WETH stems from the opportunity to borrow stablecoins at favorable rates, thanks to the interest earned on the asset.
Therefore, we recommend raising the weETH supply cap to 96,000. The growth in on-chain weETH supply supports this proposal and aims to boost further supply on-chain while also marginally increasing the demand for WETH on Aave.
Specification
| Chain | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum | weETH | 950,000 | 1,400,000 | 200,000 | - |
| Scroll | weETH | 35,000 | 46,500 | 6,400 | - |
| Base | weETH | 23,000 | 25,200 | 9,000 | - |
| Arbitrum | weETH | 80,000 | 96,000 | 25,000 | - |
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
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