[ARFC] Deploy an Etherfi/Stablecoin Aave v3 Instance

Governance
1

[ARFC] Deploy an Etherfi/Stablecoin Aave v3 Instance

Author: ACI

Date: 2024-07-29

Risk Parameters have been updated after Risk Service Providers feedback - 2024-08-01
ARFC has been updated to add pyUSD and FRAX as non-collateral assets - 2024-08-07
Risk Params updated with pyUSD and FRAX 2024-08-14
Due to some technical difficulties with GHO facilitator implementation at this stage, references to GHO and GHO facilitators have been removed - 2024-08-19.

Summary

This proposal suggests deploying an Aave v3 instance focused on providing liquidity for weETH holders to borrow stablecoins.

Motivation

The demand for borrowing wETH on Aave using weETH as collateral is extremely high, with caps being filled within minutes each week.

While this $2B growth is welcomed and responsible for ~$12.5M yearly revenue (at current ETH prices) for the DAO, it has created some frustration for significant users looking to borrow stablecoins using their weETH as collateral.

With this asset being constantly at cap, users are wary of leveraging Aave for this use case as they have legitimate concerns about their ability to add more collateral/debt to (de)leverage following market conditions.

To provide weETH holders with more suitable options, we propose creating a dedicated weETH/stablecoin Aave v3 Instance.

This market also lays the groundwork for future integrations & synergies with EtherFi’s Cash product.

Specification

Risk Parameters have been provided by Risk Service Providers and the current ARFC has been updated accordingly 2024-08-01
Updated ARFC to include pyUSD and FRAX as non collateral assets
Due to some technical difficulties with GHO facilitator implementation at this stage, references to GHO and GHO facilitators have been removed.

weETH USDC pyUSD FRAX
Isolation Mode No No No No
Enable Borrow No Yes Yes Yes
Enable Collateral Yes No No No
E-Mode Category N/A N/A N/A N/A
Loan To Value 78% - - -
Liquidation Threshold 81% - - -
Liquidation Bonus 6% - - -
Reserve Factor - 10% 20% 20%
Liquidation Protocol Fee 10% - 10% 10%
Supply Cap 50,000 140,000,000 60M 54M
Borrow Cap 0 135,000,000 15M 12M
Debt Ceiling N/A N/A N/A N/A
uOptimal - 90% 90% 90%
Base - 0% 0% 0%
Slope1 - 6.5% 5.5% 5.5%
Slope2 - 60% 80% 80%
Stable Borrowing Disabled Disabled Disabled Disabled
Flashloanable Yes Yes Yes Yes
Siloed Borrowing No No No No
Borrowable in Isolation No No No No

The proposed weETH/Stablecoin Aave v3 instance will implement the following:

  • The market will include weETH, USDC, pyUSD, FRAX.

  • This market will not have E-Mode, but due to its focused nature and limitation of cross-collaterals, it’s proposed to have a higher LTV/LT status for weETH than for the main instance.

The risk steward will dynamically adjust weETH supply caps based on stablecoin liquidity to ensure stablecoin borrowing remains viable.

In addition, we propose that the Aave DAO consider the following:

  • Introduce a stablecoin deposit incentive program to kickstart stablecoin liquidity in this new instance using Merit or other initiatives to be discussed.

The deployment will be handled by Catapulta on behalf of the Aave DAO.

Useful Links

[TEMP CHECK] Deploy an Etherfi/Stablecoin Aave v3 Instance

TEMP CHECK Snapshot

Disclaimer

The ACI has not been compensated by Etherfi for the publication of this proposal.

The ACI and several ACI team members are both weETH and ETHFI holders.

Next Steps

  1. Publish a standard ARFC and collect community & service provider feedback before an ARFC snapshot.
  2. If the ARFC snapshot passes, publish an AIP vote for final confirmation and enforcement.
  3. Work with service providers and Etherfi to release and promote the new Aave V3 instance.

Copyright

Copyright and related rights waived under CC0

6 Likes
2

Summary

Chaos Labs supports a new Etherfi/Stablecoin Aave v3 instance on Mainnet and provides the recommended parameters below.

Motivation

We support the proposed deployment with the intention of using stablecoin borrowing. We have observed virtually unlimited demand to use weETH as collateral. However, to this point, it has almost entirely been for leveraged yield strategies, in which a user borrows an ETH-correlated asset against their weETH. This has likely crowded out some users who prefer to use the asset in a manner similar to WETH, borrowing stablecoins against it.

Additional Considerations

  • WETH liquidity on all chains that offer weETH has been stretched to its limit, requiring careful management to ensure that borrow demand does not cause utilization to surge above UOptimal, causing an increase in borrow rates that makes leveraged yield strategies unprofitable. This new market could relieve some pressure by increasing the non-E-Mode borrowing power of weETH, leading to relatively less looping and more stablecoin borrowing.
  • However, given that virtually all borrowing against weETH up to this point has been WETH, it remains to be seen how much demand there will be in this new market. For this reason, we recommend starting with supply caps using our standard methodology, in which they are set at two times the amount of liquidity available under the Liquidation Bonus.
  • Stablecoin rates must be calibrated carefully to ensure suppliers are properly compensated; proposed supply incentives will be useful in this market. Additionally, we agree that GHO borrow rates can be set temporarily lower in this instance to stimulate demand.
  • We recommend disabling borrowing of weETH to prevent weETH-weETH looping, which may take up valuable supply cap space. Additionally, we recommend disabling USDC as collateral to prevent farming of proposed supply incentives.

Specification

For GHO, we recommend a starting cap of 5.25M GHO (5% of total supply) and a borrow rate set 0.5 percentage points lower than the main GHO facilitator.

weETH USDC
Isolation Mode No No
Enable Borrow No Yes
Enable Collateral Yes No
E-Mode Category N/A N/A
Loan To Value 78% -
Liquidation Threshold 81% -
Liquidation Bonus 6% -
Reserve Factor - 10%
Liquidation Protocol Fee 10% -
Supply Cap 50,000 140,000,000
Borrow Cap 0 135,000,000
Debt Ceiling N/A N/A
uOptimal - 90%
Base - 0%
Slope1 - 6.5%
Slope2 - 60%
Stable Borrowing Disabled Disabled
Flashloanable Yes Yes
Siloed Borrowing No No
Borrowable in Isolation No No
5 Likes
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Summary

LlamaRisk supports the parameters recommended by @ChaosLabs for the launch of the Aave V3 EtherFi instance. We discussed these parameters jointly during our review process. Although we initially had larger supply caps in mind, we agree that the demand for weETH/stablecoin borrowing still needs to be proven. Therefore, an iterative approach is preferable.

An Aave V3 EtherFi instance should facilitate the weETH/stablecoin borrowing use case, which currently accounts for 0.45% of the borrowed assets against weETH on the main instance due to the fully utilized supply cap. If weETH exhibits behavior similar to wstETH on the main instance, given the current value borrowed against weETH, we estimate that the potential borrowing demand for stablecoins could exceed $500m. A higher LTV/LT for weETH, an incentive program for USDC deposits, and a slightly lower borrowing rate for GHO will help bootstrap this new instance. Meanwhile, a borrowing cap of $5.25m for GHO will limit the relative weight of weETH as GHO collateral.

We will keep a close watch on the deployment of new Aave V3 standalone instances to ensure maximum incentive effectiveness and to make sure it serves its intended purpose. Additionally, we are excited about the new EtherFi Cash program and its potential integration with this EtherFi-specific instance.

Detailed remarks

Background on Lido instance as a comparative basis

The Aave V3 Lido instance, the first isolated deployment on Ethereum mainnet, was tailored for Lido’s wstETH looping use case. Although it focuses on WETH looping, it offers valuable insights for bootstrapping the new EtherFi instance. This separate instance was created to address the fully utilized supply cap on the main instance, which hindered stablecoin borrowers from managing liquidation risks. weETH depositors can borrow WETH using efficiency mode (eMode) with higher LTV and LT parameters. Additionally, it helps reduce the concentration of Lido-related assets in the main Aave V3 system.

image
Source: Aave V3 - Lido Instance, August 1st, 2024

To attract WETH deposits over wstETH holdings, the WETH lending rate was set higher than wstETH’s, supplemented by liquidity incentives. The strategy proved successful, with TVL reaching around $275m by August 1st, 2024. Consequently, WETH was removed as collateral to prevent incentive farming. While the market’s bootstrapping succeeded, it remains to be seen how sticky this liquidity will be over time after incentives cease.

Potential demand for weETH/stablecoin borrowing

While the demand for weETH/stablecoin borrowing remains unproven, we can draw insights from stETH on the main instance. stETH, which we consider a safer and more mature asset compared to weETH, has a similar profile on the LSD side. The use cases for stETH on the main instance ($2.04b in borrowed assets) are:

  • 48.4% for WETH looping
  • 39.2% for stablecoin borrowing
  • 12.4% for borrowing other volatile assets

Source: stETH collateral split

The main use case is WETH looping, but stablecoin borrowing follows closely at 39.2% of the borrowed value. Currently, stablecoin borrowing against weETH on the main instance is only 0.45%. This low figure likely results from the fully utilized supply cap of weETH on the main instance. Using stETH on the main instance as a reference, a specific weETH/stablecoin instance could serve a stablecoin borrowing demand against weETH of over $500m, based on the current total borrowed value against weETH of $2b.

GHO collateral composition

The GHO borrowing cap currently sits at $105m and is backed by a diverse basket of assets. We recognize the importance of maintaining this diversification as the GHO supply grows to limit GHO’s reliance on a single collateral. In that sense, we support the proposed GHO borrow cap of $5.25m for weETH. This borrowing cap should be increased along with the borrowing caps of other collaterals backing GHO, thus maintaining a healthy relative weight for each collateral.

image
Source: ChaosLabs’s dashboard, August 1st, 2024

To successfully bootstrap the new market, it needs to be economically attractive for weETH and USDC holders to deposit on this market for the stablecoin borrowing use case. For weETH holders, since the supply cap is reached on the main instance, depositing into the new instance will be the only venue for borrowing against it. Therefore, we expect significant weETH deposits upon launch.

Currently, only 0.45% of the assets borrowed against weETH are stablecoins on the main instance, so we don’t anticipate significant transfers from the main instance to the new EtherFi instance. Nevertheless, we support using higher LTV/LT values for weETH, adding an incentive program for USDC, and a lower GHO borrowing rate to kickstart this new Aave V3 instance successfully. To prevent incentive farming and avoid rapid exhaustion of supply caps, asset looping should be prohibited for both weETH and USDC.

6 Likes
4

We at Frax Finance are pleased to share the recent successful vote on the Frax Finance AMO proposal, which received overwhelming support from our community. This proposal seeks to onboard and activate an AMO that lends FRAX to Aave v3, authorizing a lending AMO to deposit up to 100,000,000 FRAX into the aFRAX v3 pool.

Furthermore, we are interested in the Etherfi/Stablecoin Aave v3 instance proposal and excited about the potential synergies it offers. The interest in expanding our presence within the Aave ecosystem has been growing, and we are eager to announce our interest in minting in the Etherfi market. This strategic move aligns with our ongoing efforts to enhance liquidity and provide robust support for DeFi protocols.

We are also enthusiastic about the potential to remove Frax from isolation mode and onboard sFRAX, adding another layer of integration and utility within the Aave framework. We believe this will not only boost liquidity but also provide more options for users to engage with Frax assets in a secure and efficient manner.

We look forward to continued collaboration and the positive impact these initiatives will bring to both the Frax and Aave communities.

7 Likes
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To further leverage synergies with friendly ecosystem participants, ACI proposes that pyUSD and FRAX be included as non-collateral assets for the EtherFi Aave instance.

Following the recent FRAX Finance AMO proposal which creates an AMO to deposit up to 100,000,000 FRAX in the Aave V3 Frax pool, it is believed this will create significant opportunities which can be capitalised on through this addition to the proposed EtherFi Aave instance.

ARFC has been updated with pyUSD and FRAX as non-collateral assets, and Risk Parameters for both have been provided by Chaos Labs.

6 Likes
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Supportive of the FRAX addition. Frax is open to deploy a lot liquidity which helps both ecosystems :pray:

1 Like
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Looking forward to seeing the results of adding FRAX to this instance, from our perspective, this would be a valuable addition that will create value for users and the Aave instance.

1 Like
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The current proposal has been escalated to ARFC Snapshot.

Due to some technical difficulties with GHO facilitator implementation at this stage, references to GHO and GHO facilitators have been removed. ARFC has been updated and ARFC Snapshot reflects it.

Vote will start tomorrow, we encourage everyone to participate.

2 Likes
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The current ARFC Snapshot just ended, reaching both Quorum and YAE as winning option, with 516K votes.

Therefore, the ARFC to Deploy an Etherfi/Stablecoin Aave v3 Instance has passed.
Next step will be the publication of an AIP for final confirmation and enforcement of the proposal, in order to launch the new instance.

3 Likes
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We noticed our recommendations differed from what was posted, likely due to a typo. Here are our final recommendations that will be implemented in the AIP:

weETH USDC pyUSD FRAX
Isolation Mode No No No No
Enable Borrow No Yes Yes Yes
Enable Collateral Yes No No No
E-Mode Category N/A N/A N/A N/A
Loan To Value 78% - - -
Liquidation Threshold 81% - - -
Liquidation Bonus 6% - - -
Reserve Factor - 10% 20% 20%
Liquidation Protocol Fee 10% - 10% 10%
Supply Cap 50,000 140M 60M 15M
Borrow Cap 0 135M 54M 12M
Debt Ceiling N/A N/A N/A N/A
uOptimal - 90% 90% 90%
Base - 0% 0% 0%
Slope1 - 6.5% 5.5% 5.5%
Slope2 - 60% 80% 80%
Stable Borrowing Disabled Disabled Disabled Disabled
Flashloanable Yes Yes Yes Yes
Siloed Borrowing No No No No
Borrowable in Isolation No No No No
4 Likes
11

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