[ARFC] Deploy a Lido Aave v3 Instance

[ARFC] Deploy a Lido Aave v3 Instance

Author: ACI (Aave Chan Initiative)

Date: 2024-06-24


Summary

This proposal suggests joining the Lido Alliance as the Aave DAO and deploying an Aave v3 instance focused on the Lido ecosystem.

Motivation

Aave and Lido have historically seen symbiotic growth, with stETH being one of the premier collaterals on Aave and leveraged staking being one of the most profitable use cases for both Aave DAO and Lido users.

Lido is in the process of launching the Lido Alliance, which will reward novel use cases of staked ETH and support further growth of the Lido ecosystem. This ARFC proposal suggests that Aave supports Lido Alliance efforts by deploying a new Aave V3 ETH market for Lido. This Aave v3 instance will be designed and tuned to support stETH leverage loopers. The deployment will only include wstETH and wETH assets with E-Mode enabled.

Lido has committed incentive programs and ecosystem support for this instance in order to bootstrap liquidity and promote additional programs within the Lido Alliance.

This market will be bootstrapped with wETH from the Ahab program to attract wETH liquidity.

wETH suppliers will also be proposed to be eligible to a dedicated Merit Boost

Incentives from Lido will be detailed ahead of the AIP deployment.

Specification

The Lido Alliance’s Aave v3 instance implements the following:

  • The borrow cap of wETH will be set to 90% of supplied wETH, with updates tightly controlled by the risk steward. This will ensure that stETH/wETH loops are consistently profitable and can’t go into negative territory.
  • E-Mode LTV & LT are set 50 bps above all other Aave implementations, making it the most efficient loop venue in the industry.
  • For the first 6 months of the Lido Alliance Aave v3, wETH slope1 will be set at 2.50%, ((currently 2.7% on mainnet and on L2s) and wETH RF set at 10% (currently 15% on all markets). This will make it the most profitable venue to loop stETH & wETH.
  • wstETH RF will be 5%.

The deployment of the Aave V3 Lido Ecosystem Aave will be done by Catapulta on behalf of the Aave DAO.

Parameter wstETH value wETH value
Isolation Mode No No
Borrowable Yes Yes
Collateral Enabled Yes Yes
Supply Cap 650K 900K
Borrow Cap 12k 810K
Debt Ceiling NA NA
LTV 80.00% 82.00%
LT 81.00% 83.00%
Liquidation Bonus 6% 5%
Liquidation Protocol Fee 10.00% 10.00%
Variable Base 0.0% 0.0%
Variable Slope1 3.5% 2.50%
Variable Slope2 85% 85%
Uoptimal 45% 90%
Reserve Factor 5.00% 10%
Stable Borrowing Disabled Disabled
Flahloanable Yes Yes
Siloed Borrowing No No
Borrowed in Isolation No No
E-Mode Yes Yes
E-Mode LTV 93.5% 93.5%
E-Mode LT 95.5% 95.5%
E-mode Liquidation Bonus 1% 1 %

Useful Links:

Lido Alliance proposal: Lido Alliance: An Ethereum-Aligned Ecosystem - Proposals - Lido Governance

[TEMP CHECK] Deploy a Lido Aave v3 Instance

Disclaimer:

The Aave Chan Initiative is not directly affiliated with Lido and did not receive compensation for creating this proposal. The ACI and its employees hold stETH.

Next Steps

  1. If consensus is reached on this ARFC, escalate this proposal to the ARFC Snapshot stage.
  2. If the ARFC snapshot outcome is YAE, publish an AIP vote for final deployment and enforcement of the proposal.
  3. Work with service providers and Lido Alliance to release and promote the new Aave v3 instance.

Copyright:

Copyright and related rights waived under CC0.

2 Likes

Could you please provide information regaring the questions form @WintermuteGovernance seen in the TEMP CHECK here [TEMP CHECK] Deploy a Lido Aave v3 Instance - #5 by WintermuteGovernance

1 Like

Answers to @EzR3aL and @WintermuteGovernance questions here:

The benefit of new instance is it allow wstETH users best experience for looping and keep Aave DAO as main venue for largest Lido users. It also allow DAO to be more aggressive on main Aave v3 instance where borrowers are willing to pay higher rates for WETH borrow without negative impact on our long term users.

We expect that new instance to bring net new inflows of WETH because of Lido and potential Merit incentives. So this should grow overall Aave deposits of WETH and wstETH. This also keep isolated risk to onboard Lido Alliance assets like the new LRTs from Mellow.

Aave DAO will be the sole recipient of revenue generated from the Lido instance.

Our expectation is that wtstETH and wETH migrated is offset by growth in deposits to that instance over the long term as it will be the most attractive place to loop stETH on chain. It will also benefit from Lido marketing and incentives. Long term additional Lido Alliance assets like LRT can be added to add further revenue streams for Aave DAO.

Risk stewards have agreed to adding this instance to their scope of work, and can confirm here.

Coverage by the Safety Module for this instance would need a separate governance vote.

To recap benefits for Aave DAO are many. This will solidify our position as venue of choice for wstETH loopers; improve economics of wETH borrow for our users and DAO as we can go with higher rates later; and drive inflows from Lido Alliance incentives and new assets in risk isolated manner. Long term this grows Aave TVL, market share and revenues.

We have asked Lido and the other service providers to weigh in with further details on their respective scopes so that the community has full clarity on this proposal.

6 Likes

Copying @McNut’s comment from the TEMP CHECK thread here for visibility:

As a Lido DAO contributor, we are very grateful for the continued collaboration from the Aave community. Much of the success of stETH can be attributed to the quality of the marketplace that Aave has built. In fact, Aave has single handedly contributed more to the utility and adoption of stETH than any other protocol.

This proposal to form a Lido Aave v3 instance has the potential to bootstrap the next phase of stETH growth. The staking (and re-staking) industry is evolving faster than ever and many contributors to Lido DAO believe this proposal can help provide the market with some maturity and provide users with time-tested stability. The Lido Aave v3 instance is not only an opportunity to isolate risks, but a mechanism to provide dedicated incentives for stETH users and the growth of Lido Alliance around it.

To address a few of the questions that have been raised:

  • Aave DAO will be the sole recipient of revenue generated from the Lido instance. The instance is to support stETH and the Lido Alliance not to generate revenue directly from it.
  • While a lower RF may optically have an impact on Aave DAO revenue, through growth we believe it will accelerate value accrual to the DAO. It is our opinion that this instance can be the foundation for a new phase of growth in collaboration with Lido Alliance members, more than offsetting the lower RF.

In effect, there is an opportunity to uniquely support as well as mitigate the risk from the growth of stETH. The proposal marks the beginning of more explicit support from Lido DAO as it promises to cultivate the stETH ecosystem. With that in mind, the reWards committee has pre-committed 225 stETH as a first step to incentivize the adoption of this instance.

In parallel, contributors at Lido DAO are working to coordinate additional forms of support to ensure the success of the new instance.

2 Likes

Is this on multi chain?

This proposal is for Ethereum mainnet only at the moment.

1 Like

@WintermuteGovernance - to confirm, we would support Lido Alliance’s Aave v3 instance on mainnet as part of our engagement, similar to any other new Aave deployment.

Summary

We support @ACI’s proposed deployment and its looping-focused initial parameter recommendations. We expect the Lido Alliance instance to cannibalize some of Aave V3’s existing wETH and wstETH liquidity on mainnet. However, depending on incentives, it could generate new net inflows of both wETH and wstETH protocol-wide.

Additional Considerations

  • Seven of the ten largest wETH depositors on Aave v3 mainnet are borrowing assets other than wstETH against it, while the remainder are deposit-only. It may be impossible to attract the former type of user to a wETH-wstETH isolated instance, given that wstETH will be the only other borrowable asset; this could limit the overall growth of this instance. Attracting non-borrowing WETH depositers will require strong deposit incentives to compensate for the lower Slope1 on the new instance.

  • The migration of wETH and wstETH to the new instance will take time, and this instance will be the first of its kind. For these reasons, we recommend starting with supply and borrow caps roughly half as large as those currently proposed. Overall, this instance does not present new risks to the protocol.
  • We also suggest reducing wstETH’s UOptimal to 45%, given its limited borrow demand.

Specification

Parameter wstETH value wETH value
Isolation Mode No No
Borrowable Yes Yes
Collateral Enabled Yes Yes
Supply Cap 650K 900K
Borrow Cap 12k 810K
Debt Ceiling NA NA
LTV 80.00% 82.00%
LT 81.00% 83.00%
Liquidation Bonus 6% 5%
Liquidation Protocol Fee 10.00% 10.00%
Variable Base 0.0% 0.0%
Variable Slope1 3.5% 2.50%
Variable Slope2 85% 85%
Uoptimal 45% 90%
Reserve Factor 5.00% 10%
Stable Borrowing Disabled Disabled
Flahloanable Yes Yes
Siloed Borrowing No No
Borrowed in Isolation No No
E-Mode Yes Yes
E-Mode LTV 93.5% 93.5%
E-Mode LT 95.5% 95.5%
E-mode Liquidation Bonus 1% 1 %
6 Likes

The current proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.