[ARFC] Chaos Labs Risk Stewards - Increase WETH Supply Cap on Aave V3 Arbitrum - 06.02.2024

Summary

A proposal to increase the supply cap for WETH on Aave V3’s Arbitrum deployment

Motivation

WETH

Following a surge in new deposits, WETH has reached 93% supply and borrow cap utilization.

Supply Distribution

The largest supplier has deposited 25% of the total WETH in this market and is borrowing $57M USDC against their collateral.

This supplier is a dHedge strategy, which has seen rapid growth in TVL following its launch on Arbitrum.

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It aims to achieve 3x leverage on ETH using leverage on Aave and has been consistently rebalancing its position to reach the desired leverage.

Borrow Distribution

The largest borrower is borrowing $52M WETH against wstETH collateral in a looping strategy, putting this position at relatively low risk of liquidation.

Recommendation

Given on-chain liquidity and user distribution, we recommend increasing the supply cap to 120K. Given high utilization and corresponsing borrow rates we recommend no increase to the borrow cap and will recommend additional increases at a later stage.

Specification

Chain Asset Current Supply Cap Recommended Supply Cap Current Borrow Cap Recommended Borrow Cap
Arbitrum WETH 100,000 120,000 90,000 No Change

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

Hello chaos! Thank you for promptly monitoring the caps, as always!

In this proposal, the data table for caps shows that the current borrow cap is 72k, when in reality, it is already 90k (as listed in the reccomened table). Just an FYI, probably a typo! :yellow_heart:

Additionally, the paragraph lists a reccomended increase on the supply cap to 150k, whilst the table shows 120k. Which is the true recommendation?

Thanks for the comment @Aave_truetocaesar the post has been fixed - the recommendation is to increase the supply cap to 120k with no change to the borrow cap

The transaction for this proposal has now been executed.

I see the comment about the increase in borrow cap. Perhaps that would be helpful to take the down the borrow utilization for ETH on Arbitrum V3 given the recent increase in borrow demand.