Summary
A proposal to:
- Increase ezETH’s supply cap on Aave’s V3 Ethereum Lido instance.
- Increase wstETH’s borrow cap on Aave’s V3 Ethereum Lido instance.
- Increase USDS’s supply and borrow cap on Aave’s V3 Ethereum Lido instance.
ezETH (Ethereum Lido)
ezETH has reached 100% supply cap utilization on Ethereum Lido instance.
While this cap increase was quickly filled like the previous one, it received deposits from up to 14 accounts this time. A significantly wider distribution than the 1 user from the previous cap increase. Of those, 3 of them represented 52,000 of the 60,000 ezETH increase.
Supply Distribution
As CIAN, the protocol behind the previous cap increase, increased its position further, it still represents a significant share of the utilization. Given the high correlation between the supply and borrow assets, CIAN’s position maintains a safe health score of 1.18, and so do the other major positions in the market.
The current distribution of the market presents limited risk as both assets utilize exchange rates relative to ETH/USD. While some deviation between exchange rates may occur, it is unlikely to be large enough to cause large liquidations.
Both 0xd681 and 0x7abe are addresses associated with the DeFi protocol CIAN, which offers an ezETH Yield Layer strategy and stETH Yield Layer strategy, both utilizing ezETH “recursive staking” on Aave. The stETH strategy is 97% utilized, with 83.58% of its funds allocated to ezETH recursive staking, while the ezETH strategy is 88% utilized, with 47% of its funds allocated to ezETH recursive staking, while the other 52% (about 1533 ezETH) is being held idly and will likely be deployed on Aave when caps are raised. Given the emergence of DeFi strategies leveraging the new ezETH/wstETH E-Mode, it is likely that cap increases will be filled quickly.
Recommendation
Given high demand, user behavior, and the low risk of liquidations, we recommend doubling the supply cap to 240,000 ezETH. This increase is backed by Chaos Labs’ risk simulations, which account for user behavior, on-chain liquidity, and price impact, ensuring that the higher cap does not introduce additional risk to the platform.
wstETH (Ethereum Lido)
On the other side of this new E-Mode, wstETH’s borrow cap has reached 77% utilization. With a market utilization of 49%, there is still a significant buffer of available supply to meet the added expected borrowing demand.
Additionally, wstETH, thanks to the supply yield generated from the borrowing, shows a 45K wstETH increase in deposits since the last borrow cap increase. We expect this trend to intensify further in the future, and we also expect some of the wstETH supply from the main Ethereum instance to migrate to the Lido instance following the increased supply yield.
Recommendation
We recommend increasing wstETH’s borrow cap to 140,000 in order to target a market utilization of 80%. This increase is again backed by Chaos Labs’ risk simulations, ensuring that the raised borrow cap does not introduce additional risk to the platform.
USDS (Ethereum Lido)
USDS has reached 75% of its supply cap and 67% of its borrow cap on Ethereum Lido. The current utilization rate of the pool is 80.5%.
Supply Distribution
A single wallet provides the entirety of the USDS supply. This is thanks to the commitment made by Maker to Aave, where they would provide initial liquidity to the USDS asset on the Lido instance.
Thanks to USDS not being enabled as collateral and the Maker DAO’s commitment, the supply’s centralization does not pose any risk.
Borrow Distribution
The majority of USDS borrowers use wstETH as collateral. While the two biggest positions represent a significant portion of the supply, all of the top USDS borrowing positions maintain a safe health score about 1.2 and appears to be actively managed. Hence none of the top borrowing position represents a significant liquidation risk.
Recommendation
Given the safe user behavior of USDS borrowers, we recommend increasing USDS’s supply cap to 200,000,000 and the borrow cap to 180,000,000 USDS. This increase is again backed by Chaos Labs’ risk simulations, ensuring that the raised supply and borrow cap do not introduce additional risk to the platform.
Specification
| Chain | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum Lido | ezETH | 120,000 | 240,000 | - | - |
| Ethereum Lido | wstETH | 650,000 | - | 112,000 | 140,000 |
| Ethereum Lido | USDS | 100,000,000 | 200,000,000 | 90,000,000 | 180,000,000 |
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