A proposal to increase the supply cap for wstETH on Aave V3 Ethereum and Arbitrum.
The supply cap for wstETH on Ethereum and Arbitrum is currently at 100% utilization.
Following our supply and borrow cap methodology, and our analysis here for wstETH on Arbitrum, we recommend increasing wstETH on Ethereum from 300K to 450K and on Arbitrum for 18.75K to 30K.
||Current Supply Cap
||Recommended Supply Cap
||Current Borrow Cap
||Recommended Borrow Cap
Once we receive feedback from @Gauntlet on the above recommendations, we will be able to move forward to implement these updates via the Risk Steward process.
We support the increase of wstETH supply cap on mainnet to 450k and the use of Risk Steward to increase the cap.
Given wstETH pricing still includes market rate on Arbitrum and does not use CSPA, we do not support the increase for the supply cap for wstETH to 30000 on Arbitrum. Our aggressive cap is thresholded at the current supply cap given current liquidity levels. Should the community wish to increase the cap on Arbitrum, it should go through AIP.
We’ve prepared the payload to be executed via the Risk Steward process for this proposal.
The wstETH supply cap update from 300k to 450k for mainnet has been executed via Risk Steward.
Could you please provide the information accessable to the public ?
Hi @ChaosLabs @Gauntlet thanks for the post.
Given the AIP to increase wstETH supply cap on Arbitrum needing to go to an AIP, could you please expand upon both of your rationales in favour of and against increasing the supply cap in order for the community to make an informed decision? At the moment there isn’t enough information available to be able to make an informed choice.
With the update to the wstETH oracle on Arbitrum implemented, the price is calculated from the exchange rate leading to a steady correlation between wstETH and ETH. As the primary use case on V3 Arbitrum involves leveraging wstETH as collateral to borrow ETH, the risk of liquidation is minimal. Therefore, from a market risk perspective, we are comfortable recommending this increase to unblock protocol growth. The main risk remains counterparty risk, which we do not address in our methodology or recommendations. You can read more about our approach to LSDs here.
Thank you both @Gauntlet and @ChaosLabs for the post.
Just a clarifying question: with the update to the wstETH oracle on Arbitrum, the price is NO LONGER based on market price? That means the depeg of stETH and ETH is no longer a concern? So the only constraint, according to Chaos Lab’s supply cap methodology for LSDs, is that the supply cap should be <50% of total circulating supply of wstETH on Arbitrum, which is over 60K right now? Just want to make sure we are following the reasoning.
Thanks @Michigan_Blockchain and @lbsblockchain for the questions - as we have stated previously, Gauntlet prefers to wait until community alignment on potential killswitch options before increasing supply caps beyond what our original methodology recommends. These killswitch options necessarily help reduce risk when an LST depeg event occurs, something that we cannot predict in terms of likelihood, point in time, nature, duration, or magnitude.
For instance, one lever we explore helps to freeze the depegging LST and setting the LTV → 0 to prevent additional supply and BASE borrowing in the event of a depeg and uncertain fair values. Currently, if market price depegs from fair value of LST / BASE, users can continue to supply/borrow at high LT, against the without liquidation fear. If the depeg is realized, and the fair value of LST / BASE declines below LT, then insolvencies may occur.
The CSPA update has enabled LSTs to be priced from their BASE asset * the exchange rate, so liquidation risks are reduced, especially from transient depegs that are are just due to market variance. This is very important to facilitate borrowing the BASE asset. However, like we mentioned before, permanent depegs are impossible to predict, which is why Gauntlet recommends alignment on killswitch options first before increasing caps above our aggressive cap methodology recommendations.
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