Overview
Following the prior assessment of the MegaETH deployment in this post, this analysis presents an initial set of recommendations based on the list of assets proposed by Aave Labs.
As the previous post included an initial review of the network and no further information has been released, this post will not cover MegaETH’s technical aspects.
This deployment includes an initial set of core assets that have been listed on existing Aave instances; as such, their technical aspects have already been covered and will not be the focus of this analysis.
As Mega’s native stablecoin, USDM, is a key asset for deployment, a technical analysis will be performed on it.
Furthermore, as the MegaETH network is currently in a private mainnet state and has not yet deployed its initial ecosystem projects, liquidity bootstrapping has not been completed. As such, the parameters recommended in this analysis will be based on pre-launch commitments, and Chaos Labs will adjust the recommended values if realized liquidity following the chain launch falls short of pre-launch assumptions and commitments.
MegaETH Network Overview
The initial ecosystem-relevant liquidity for the Aave launch is expected to be split between two main venues. Kumbaya is positioned as the primary AMM venue for initial liquidity, while World Capital Markets (WCM) is expected to provide spot CLOB execution with market-making guarantees by the MegaETH team on key pairs.
MegaETH currently adopts an OP Stack for ETH and ERC-20 bridging from Ethereum to MegaETH, running OP Stack’s Standard Bridge with minor parameter adjustments. Deposits finalize after Ethereum finality, while withdrawals inherit the standard optimistic bridge delay, commonly on the order of seven days.
While bridging ERC20 tokens will be available through the canonical bridge, it is expected to be meaningfully expanded via third-party bridge and routing integrations. This addition meaningfully reduces the bridging of MegaETH assets to the Ethereum Mainnet, enabling more efficient arbitrage and peg stability.
Oracle and pricing infrastructure
MegaETH, in collaboration with Chainlink, has integrated Chainlink Data Streams through a native precompile. This model enables access to per-block market data, improving latency and pricing accuracy for fast-moving markets.
The benefits, particularly tighter oracle freshness and reduced liquidation latency, are promising but hinge on the robustness of the integration under adversarial conditions. Specifically, given the higher frequency of updates, the feeds are exposed to a higher risk of market manipulation.
Until the reliability and safety of Data Streams are fully validated, Chaos Labs recommends adopting standard Chainlink Oracle feeds for Aave’s initial deployment on the MegaETH chain.
Market Making Agreement
MegaETH Team has communicated the presence of a market-making agreement in place to bootstrap the WCM spot market orderbooks. This agreement materially strengthens price formation for the major volatile spot pairs relevant to BTC and ETH by committing to top-of-book spreads and minimum executable depth on both sides of the book from Day 1.
For BTC-USDm and ETH-USDm, the liquidity provider is required to maintain a top-of-book bid/offer spread at or below 0.05% with at least 98% KPI uptime, while also quoting meaningful depth bands of approximately $50k within 25 bps, $100k within 50 bps, and $250k within 100 bps per side.
This combination of spread and depth requirements establishes a reliable arbitrage surface against external reference venues, as any sustained divergence from CEX pricing creates immediate economic incentive for arbitrageurs to trade into WCM, compressing basis and stabilizing the onchain mid-price. Although the committed depth is not sufficient to absorb very large liquidation flows in a single print without impact, it is sufficient to support gradual execution, where liquidations can be processed in increments while arbitrage refills the book and re-anchors quotes. Because WCM runs natively on MegaETH without cross-venue bridging latency, the orderbook liquidity is effectively part of the same onchain liquidity domain as AMM pools, improving cross-venue price alignment and reducing the persistence of AMM dislocations relative to oracle prices.
Assets
WETH
WETH can be bridged via MegaETH’s canonical OP Stack Standard Bridge from Ethereum, with deposits finalizing after Ethereum finality and withdrawals inheriting optimistic bridge delays. Initial liquidity is expected to be primarily bootstrapped on Kumbaya via team-committed WETH/USDM and WETH/USDT0 pools, and secondarily supported by CLOB liquidity on WCM via ETH/USDM quoting commitments.
Following discussions with the MegaETH team, we expect the initial TVL of the WETH/USDM and WETH/USDT0 liquidity pools to be $33.3M combined.
Given the pre-launch nature of liquidity, we recommend configuring WETH as collateral only within WETH/Stablecoin E-Mode (USDT0/USDM) and enabling its borrowability only within the LST/LRT E-Modes.
Chaos Labs recommends aligning the LTV/LT parameters and the IR Curve of WETH with those on Ethereum Core and Plasma Instance.
The initial supply and borrow cap of WETH and the other assets in this analysis are calibrated on the liquidity commitments provided by the team.
Chaos Labs will adjust the recommended values if realized liquidity following the chain launch falls short of pre-launch assumptions and commitments.
BTC.b
BTC.b, launched by Lombard following its acquisition from Ava Labs, is a 1:1 BTC-backed asset with permissionless mint/burn and on-chain Proof of Reserve. It operates with cross-chain capabilities via Chainlink CCIP. Following the change of ownership of the product, the subsequent deployments of BTC.b adopt the same architecture of minting/redeeming used for Lombard’s LBTC product.
Liquidity on MegaETH will be driven by a WCM BTC/USDM CLOB and a BTC.b/USDM AMM pool. Per the team’s communication, the expected initial TVL of the BTC.b/USDM AMM pool is expected to be between $2-3M, with an additional commitment of $10M of liquidity available on Ethereum mainnet accessible following the bridging process.
Given BTC.b’s use of new contracts, which have not been adopted by Aave prior to this deployment, the asset should launch as a collateral-only asset in a BTC-stable E-Mode alongside USDT0 and USDM. Conservative risk parameters are warranted given the combined custody and bridging surfaces.
wstETH
ezETH is a restaked ETH token (LRT) whose primary risk drivers, beyond ETH correlation, include restaking-specific tail risks and a reliance on an exchange-rate component for pricing. On MegaETH, ezETH issuance is expected to occur via a cross-chain minting flow involving a HypXERC20Lockbox on Ethereum mainnet. The lockbox transmits cross-chain messages through the HyperLance Mailbox, which are relayed to the Mailbox on MegaETH and validated before invoking the HypXERC20 contract to mint ezETH on L2. Liquidity is expected to be bootstrapped on Kumbaya via a fixed TVL commitment.
Following discussion with the MegaETH team, we are expecting the initial TVL of the Kumbaya wstETH liquidity pools to be of a combined value of $5M.
wstETH should be enabled as collateral and with its borrowing disabled and included in a WETH-correlated E-Mode to support looping/leveraged staking demand. In addition, we recommend wstETH to be included in a separate collateral-to-stables E-Mode, reflecting historically stronger and more persistent demand for wstETH collateral against stable borrowing versus LRT collateral against stables. Stable E-Mode efficiency must remain conditioned on realized sell-side liquidity into USDT0/USDM.
ezETH
ezETH is a restaked ETH token (LRT) whose primary risk drivers, beyond ETH correlation, include restaking-specific tail risks and a reliance on an exchange-rate component for pricing. On MegaETH, ezETH issuance is expected to occur via a cross-chain minting flow involving a HypXERC20Lockbox on Ethereum mainnet. Liquidity is expected to be bootstrapped on Kumbaya via a fixed TVL commitment.
Following discussion with the MegaETH team, we are expecting the initial TVL of the Kumbaya ezETH liquidity pools to be of a combined value of $4M.
At launch, ezETH should be collateral-enabled but restricted to a WETH-correlated E-Mode only, with borrowing disabled. Supply caps should be set from the committed AMM depth.
rsETH
rsETH is a restaked ETH token (LRT) with similar deployment-relevant considerations to ezETH. The bridging path is expected to be LayerZero OFT per team statement, implying unified-supply cross-chain mint/burn. Liquidity is expected to be provisioned on Kumbaya via a fixed TVL commitment.
Following discussion with the MegaETH team, we are expecting the initial TVL of the Kumbaya wrsETH liquidity pools to be of a combined value of $4M.
rsETH should be configured as collateral-enabled with borrowing disabled and restricted to a WETH-correlated E-Mode to support leveraged staking loops while constraining cross-asset liquidation pathways. Caps should be derived from committed liquidity.
USDT0
USDT0 is an omnichain representation of USDT built on LayerZero’s OFT standard, designed to unify liquidity across chains and support native cross-chain movement.
On MegaETH, USDT0 is expected to be a core borrowable stable asset thanks to its presence in the initial team-committed liquidity pools on Kumbaya, and as the redemption destination for USDM’s PSM backstop.
USDT0’s supply and borrow caps should be set as a function of observed and committed stable-stable and stable-ETH depth, with an explicit post-launch adjustment rule once real flows materialize. The interest-rate curve should be aligned with competitive stable markets while maintaining sufficient slope to deter sustained utilization over the kink.
USDM
USDM is MegaETH’s native stablecoin, developed in collaboration with Ethena, and is intended to serve as the canonical unit of account and the primary base liquidity asset across the chain. Its risk assessment must incorporate issuance constraints, redemption mechanics, and the credibility of its liquidity backstops.
USDM minting and redemption are permissioned at the primary layer, with issuance and burning occurring on the Ethereum mainnet, and access is restricted to entities authorized by Ethena (market makers, OTC desks, and authorized bridge operators). Public users are expected to access USDM via secondary markets on MegaETH or via routing/bridging flows that source other stablecoins and swap into USDM. This implies that, unlike fully permissionless stablecoins, USDM’s primary arbitrage loop is concentrated in a limited set of authorized actors, which can be a stabilizing factor in normal conditions but a concentration risk under operational stress.
The mint path is USDC-based at issuance time, with 1:1 issuance against deposited USDC on Ethereum, while reserves are held in USDtb with institutional custody. The design includes a redemption buffer in liquid USDC that is intended to cover near-term redemption demand; per the provided documentation, the steady-state target is approximately 10% of backing in USDC, with an initial higher buffer (25% indicated) to support early-stage redemption intensity and reduce first-week liquidity fragility. When the buffer is exhausted, authorized redeemers may redeem into USDtb directly, which shifts exit liquidity from on-chain/USDC into off-chain/venue-dependent liquidity, increasing sensitivity to operational execution and market conditions.
USDM’s cross-chain movement to MegaETH is expected to occur via OFT-compatible bridges, with minting and burning restricted to Ethereum. This architecture reduces the need for AMM-based bridge liquidity but introduces a reliance on bridging times to ensure minimal price deviations and dependence on the operational security of the OFT bridge stack. In addition, the public onboarding flow described by the team introduces a “solver/market-maker intervention” path: if on-chain USDM depth is insufficient, a designated authorized entity can mint USDM on Ethereum and supply it at par to complete a user’s conversion. This mechanism can materially reduce slippage for users, but it also increases reliance on a small authorized set to maintain the peg during adverse conditions.
The most important stabilization mechanism for USDM on MegaETH is a Peg Stability Module (PSM) backstop that guarantees 1:1 swaps between USDM and USDT0 during stress events or periods of thin liquidity. The stated flow uses a Redemption Contract that routes requests to a Settlement Contract pulling USDT0 liquidity to complete par exits. For Aave risk, the PSM is highly relevant because it can transform liquidation outcomes: if USDM is widely used as the borrowed unit, the ability for liquidators and borrowers to access USDT0 at par under stress reduces the probability of disorderly stablecoin cascades.
Given USDM’s centrality to MegaETH, Aave’s configuration should treat it as a core borrowable stablecoin but with launch parameters explicitly conditioned on realized depth in USDM pairs and on the observable readiness of the PSM backstop. Supply and borrow caps should be derived from committed stable liquidity (USDT0/USDM) plus any additional stable routes, with a conservative haircut for venue concentration and for the fact that early flows are likely to be programmatic. The interest rate curve should be designed to avoid sustained extreme utilization in the first phase, as high utilization in a stablecoin whose primary redemption loop is permissioned increases run-like dynamics if confidence is challenged. Oracle design should assume a standard $1 target with conservative upward caps and clear fallback behavior until a production-grade feed is confirmed; the recommended approach is to avoid any configuration that depends on millisecond oracle updates for USDM solvency, even if Data Streams are available, until those feeds are validated under mainnet conditions.
Oracle/Pricing Methodology
This section outlines the recommended pricing configuration for the proposed assets on MegaETH. The objective is to ensure consistent, robust, and conservative price formation aligned with existing Aave v3 standards, while accounting for asset-specific characteristics such as yield accrual.
WETH
WETH pricing is recommended to use the standard ETH-USD oracle feed.
BTC.b
BTC.b pricing is recommended to use the BTC-USD oracle feed. As the use of BTC.b’s specific price feed would introduce meaningful deviation risk stemming from reduced liquidity and market efficiency.
USDT0
USDT0 pricing is recommended to use the USDT-USD oracle feed. In addition, a stable CAPO cap is recommended to bound upward price deviations.
USDM
USDM is recommended to be hardcoded to 1 USD as its lack of collateral status prevents this setup from presenting arbitrage risk during temporary downward market deviations. At the same time, in a true fundamental depeg scenario, where USDM’s backing, redeemability, or market structure is impaired and its market price trades below $1 for a sustained period, the static oracle maintains a conservative posture for the protocol. Debt continues to be booked at 1 USD while the asset’s market value falls. From the protocol’s perspective, this improves resilience: liquidators can source USDM more cheaply to repay a 1 USD unit of debt, increasing liquidation profitability and reducing the likelihood of bad debt.
wstETH
Pricing is recommended to use the ETH-USD oracle feed as the base price, combined with a wstETH-stETH exchange rate oracle to reflect reward accrual. A dynamic CAPO adaptor is recommended to constrain extreme price movements while allowing gradual exchange rate evolution.
wrsETH
Pricing is recommended to use the ETH-USD oracle feed as the base price, combined with a wrsETH-ETH exchange rate oracle to reflect reward accrual. A dynamic CAPO adaptor is recommended to constrain extreme price movements while allowing gradual exchange rate evolution.
ezETH
Pricing is recommended to use the ETH-USD oracle feed as the base price, combined with an ezETH-ETH exchange rate oracle to reflect reward accrual. A dynamic CAPO adaptor is recommended to constrain extreme price movements while allowing gradual exchange rate evolution.
Specifications
| Parameters | Value | Value | Value | Value | Value | Value | Value |
|---|---|---|---|---|---|---|---|
| Asset | WETH | BTC.b | USDT0 | USDM | wstETH | wrsETH | ezETH |
| Isolation mode | No | No | No | No | No | No | No |
| Borrowable | No | No | Yes | Yes | No | No | No |
| Collateral Enabled | No | No | No | No | No | No | No |
| Supply Cap | 50,000 | 120 | 50,000,000 | 100,000,000 | 12,000 | 10,000 | 10,000 |
| Borrow Cap | 46,000 | - | 46,000,000 | 95,000,000 | - | - | - |
| Debt Ceiling | - | - | - | - | - | - | - |
| LTV | - | - | - | - | - | - | - |
| LT | - | - | - | - | - | - | - |
| Liquidation Bonus | - | - | - | - | - | - | - |
| Liquidation Protocol Fee | 10% | 10% | 10% | 10% | 10% | 10% | 10% |
| Variable Base | 0.0% | - | 0.0% | 0.0% | - | - | - |
| Variable Slope1 | 2.50% | - | 5.0% | 5.0% | - | - | - |
| Variable Slope2 | 8.00% | - | 10.0% | 10.0% | - | - | - |
| Uoptimal | 90.0% | - | 90.0% | 90.0% | - | - | - |
| Reserve Factor | 15% | - | 10% | 10% | - | - | - |
| Stable Borrowing | Disabled | Disabled | Disabled | Disabled | Disabled | Disabled | Disabled |
| Flashloanable | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Siloed Borrowing | No | No | No | No | No | No | No |
| Borrowable in Isolation | No | No | Yes | Yes | No | No | No |
| E-Mode | WETH/Stablecoins, wstETH/WETH, wrsETH/WETH, ezETH/WETH | BTC.b/Stablecoins | wstETH/Stablecoins, WETH/Stablecoins, BTC.b/Stablecoins | wstETH/Stablecoins, WETH/Stablecoins, BTC.b/Stablecoins | wstETH/WETH, wstETH/Stablecoins | wrsETH/WETH | ezETH/WETH |
E-Mode Configurations
WETH Stablecoins #1
| Parameter | Value | Value | Value |
|---|---|---|---|
| Asset | WETH | USDT0 | USDM |
| Collateral | Yes | No | No |
| Borrowable | No | Yes | Yes |
| Max LTV | 80.50% | - | - |
| Liquidation Threshold | 83.00% | - | - |
| Liquidation Bonus | 5.50% | - | - |
BTC.b Stablecoins #2
| Parameter | Value | Value | Value |
|---|---|---|---|
| Asset | BTC.b | USDT0 | USDM |
| Collateral | Yes | No | No |
| Borrowable | No | Yes | Yes |
| Max LTV | 70.00% | - | - |
| Liquidation Threshold | 75.00% | - | - |
| Liquidation Bonus | 6.50% | - | - |
wstETH Stablecoins #3
| Parameter | Value | Value | Value |
|---|---|---|---|
| Asset | wstETH | USDT0 | USDM |
| Collateral | Yes | No | No |
| Borrowable | No | Yes | Yes |
| Max LTV | 75.00% | - | - |
| Liquidation Threshold | 79.00% | - | - |
| Liquidation Bonus | 6.50% | - | - |
wstETH Correlated #4
| Parameter | Value | Value |
|---|---|---|
| Asset | wstETH | WETH |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 94.00% | - |
| Liquidation Threshold | 96.00% | - |
| Liquidation Bonus | 1.00% | - |
wrsETH Correlated #5
| Parameter | Value | Value |
|---|---|---|
| Asset | wrsETH | WETH |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 93.00% | - |
| Liquidation Threshold | 95.00% | - |
| Liquidation Bonus | 1.00% | - |
ezETH Correlated #6
| Parameter | Value | Value |
|---|---|---|
| Asset | ezETH | WETH |
| Collateral | Yes | No |
| Borrowable | No | Yes |
| Max LTV | 93.00% | - |
| Liquidation Threshold | 95.00% | - |
| Liquidation Bonus | 1.00% | - |
CAPO
| Asset | maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|---|
| wstETH | 9.68% | Monthly | 7 |
| wrsETH | 6.67% | Monthly | 14 |
| ezETH | 10.89% | Monthly | 14 |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
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