Summary
A proposal to:
- Increase AAVE’s supply cap on Aave’s V3 Arbitrum main instance.
- Increase LINK’s supply cap on Aave’s V3 Polygon main instance.
AAVE (Arbitrum)
AAVE has reached 99% supply cap utilization; the asset is not borrowable.
Supply Distribution
AAVE’s supply is well distributed, with the largest supplier accounting for just 6.8% of the supply, reducing the chance of large-scale liquidations in the market.
The top suppliers borrow a variety of assets, again reducing the likelihood of widespread market liquidations, especially given their varying health scores.
Overall, USDC and USDT are the most popular assets borrowed against AAVE.
This combines to create a relatively gradual collateral-at-risk slope, decreasing risk in this market.
Liquidity
Additionally, the asset’s liquidity has remained relatively stable over the past two months, with a 1,250 AAVE for USDC swap incurring 10% slippage.
While this is relatively small compared to the overall size of the market, the availability of bridging and the aforementioned gradual collateral at-risk slope allow us to recommend an increase in the supply cap.
Recommendation
Given user behavior and on-chain liquidity, we recommend doubling the supply cap. This increase is backed by Chaos Labs’ risk simulations, which consider users’ behavior, on-chain liquidity, and price impact, ensuring that the higher cap does not introduce additional risk to the platform.
LINK (Polygon)
LINK has reached 100% supply cap utilization, and its borrow cap is at 8% capacity.
Supply Distribution
The supply of LINK is also highly distributed, with the largest supplier accounting for 14.63% of the total supply.
The largest supplier borrows $3M USDT, though its largest collateral position is WBTC. Other top suppliers borrow primarily USDT and USDC/USDC.e. Overall, these assets represent 83% of the value borrowed against LINK on Polygon.
Because suppliers have varying health scores, the collateral at risk slope is gradual and does not significantly increase until LINK falls below $9.
Liquidity
LINK’s liquidity has decreased slightly over the past two months, now with a 90K LINK swap able to be completed for 10% slippage.
Our simulations find that this liquidity can support a market significantly larger than the current size.
Recommendation
Given user behavior and on-chain liquidity, we recommend doubling the supply cap. This increase is backed by Chaos Labs’ risk simulations, which consider user 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 |
|---|---|---|---|---|---|
| Arbitrum | AAVE | 18,000 | 36,000 | - | - |
| Polygon | LINK | 800,000 | 1,600,000 | 163,700 | - |
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