Overview
Chaos Labs supports the proposal to deploy a Linea Aave v3 instance to expand the Aave protocol’s user base. The following analysis focuses on the initial listing of WETH, WBTC, USDC.e, USDT, wstETH, ezETH, and weETH in the new instance, as well as an analysis of the Linea ecosystem.
Technical Architecture
Linea is a zkEVM-based Layer 2 for Ethereum, developed by ConsenSys and launched in 2023. It operates as a zkRollup that leverages Ethereum for settlement, data availability, and security. Its architecture separates execution from consensus, allowing transactions to achieve “soft finality” in about two seconds and “hard finality” on Ethereum in 8–32 hours.
Linea employs zk-SNARKs for scalability. Transactions are batched off-chain, processed by the sequencer using an optimized Geth client, and finalized on Ethereum after proof generation. While this approach ensures high throughput and low costs, the reliance on a single sequencer introduces centralization risks. Additionally, the lack of a timelock for the primary contract upgrades, such as the Bridge and the Verifier, raises additional concerns.
Linea’s EVM equivalence simplifies developer onboarding by allowing existing Ethereum smart contracts to deploy without modification.
Thanks in part to its ties with Consensys, significant dev tooling is available for the network, such as Infura and Alchemy pcs, an Etherscan-like block explorer, Safe deployment, Dune support, TheGraph, and Chainlink.
Ecosystem and Market
The TVL of Linea L2 recorded a surge to $724M following the launch of the Linea Voyage: The Surge. A point program that awarded Linea XP to bridge assets and utilize DeFi protocols within the chain. While the TVL of the network peaked in July and has since dropped to the current value of $494M, where it has held steadily over the last few months, it is yet to be seen what the reaction will be to the ending of the points program, which happened yesterday as of 25 November 2024.
The volume on the chain has averaged $22M over the last 60 days and the daily transactions has stabilized over the same time period.
DEXs
The presence of numerous DEXs with consistent liquidity is a key requirement to ensure efficient liquidation of a new Aave instance. In the case of Linea, multiple DEXs maintain sufficient liquidity to allow for the creation of the instance. The most relevant ones are:
- SyncSwap
- TVL: $21.69m
- 7-day Cumulative Volume:
- Lynex
- TVL: $20.25M
- 7-day Cumulative Volume: $123.46M
- Nile Exchange
- TVL: $16.28m
- 7-day Cumulative Volume: $45.4M
- iZiSwap
- TVL: $5.96M
- 7-day Cumulative Volume: $37.8M
- PancakeSwap
- TVL: 7.49$
- 7-day Cumulative Volume: $8.1M
Tokens
As initial assets within the Linea instance, we recommend a strict list of assets that were extensively covered by the Aave Risk Providers on multiple chains. The selection aims to provide basic functionality for the new instance, with any additions and successive listings being proposed and approved through standard governance procedures.
Chaos Labs proposes the following assets for the initial listing on the Linea instance:
| Asset | Supply on Linea | Marketcap on Linea | Volume | Liquidity | Lineascan |
|---|---|---|---|---|---|
| WETH | 22,800 | $78,9M | $18.15M | $11.7M | URL |
| weETH | 22,900 | $83,3M | $2.5M | $5.1M | URL |
| ezETH | 34,600 | $124,4M | $4.9M | $12.1M | URL |
| wstETH | 2,500 | $10,2M | $85,000 | $4.6M | URL |
| WBTC | 220 | $20,2M | $2.7M | $3.6M | URL |
| USDC.e | 28,700,000 | $28,7M | $4.7M | $8.8M | URL |
| USDT | 10,400,000 | $10,4M | $7.3M | $9.9M | URL |
Oracles
Chainlink has integrated its Data Feeds on Linea, providing Aave access to reliable data sources. Chaos Labs ensures that a Chainlink Feed already supports all proposed asset listings. It is worth noting that all of the proposed listed assets represent the Ethereum version of the asset bridged through the official Linea Bridge. Some of these bridged assets, most notably wstETH and weETH, have received official approval from the respective teams.
However, historical precedents, such as the introduction of USDC.e through Chainlink CCIP in similar situations, have led the natively bridged version to see a drop in usage and available DEX liquidity.
Listing Parameters
Given the proposed asset’s similarity to its Ethereum counterpart but the uncertainty of future liquidity brought by the recently ended point program, we recommend adopting slightly more conservative parameters for the proposed asset, in line with Scroll.
Supply and Borrow Caps
In line with Chaos Labs’ approach to setting initial supply caps, we would suggest a Supply Cap of 2x the liquidity available under the Liquidation Penalty’s price impact. We also recommend setting the borrow caps slightly over the UOptimal of each asset to allow for a borrow rate increase to follow a surge in demand.
For assets such as stablecoins, the supply cap is determined in order to allow full utilization of the other collateral assets within the instance while maintaining it below 75% of the on-chain supply.
A further exception has been made for weETH and ezETH, given their ample liquidity exceeding that of WETH. For the two assets, we recommend limiting the supply cap to the supply cap of WETH.
As such, the Price impact and the recommended Supply and Borrow cap of each initial asset are as follows:
-
WETH
Supply Cap: 1,200 WETH
Borrow Cap: 1,100 WETH
-
wstETH
Supply Cap: 800 wstETH
Borrow Cap: 400 wstETH
-
weETH
Supply Cap: 1,200 weETH
Borrow Cap: 600 weETH
-
ezETH
Supply Cap: 1200 ezETH
Borrow Cap: 600 ezETH
-
WBTC
Supply Cap: 25 WBTC
Borrow Cap: 12.5 WBTC
-
USDC
Supply Cap: 15,000,000 USDC
Borrow Cap: 13,800,000 USDC
-
USDT
Supply Cap: 7,800,000 USDT
Borrow Cap: 7,150,000 USDT
E-Modes
Thanks to the introduction of multiple ETH-correlated assets in the initial listing and given the consistent and considerable liquidity maintained by all of them, Chaos Labs recommends the creation of two Liquid E-Modes configurations. This will improve efficiency in the Linea instance and attract additional supply to WETH thanks to increased supply rates.
We recommend creating an Ethereum-Correlated E-Mode to allow users to leverage the staking yield of the LSTs and LRTs. We recommend enabling WETH as the only borrowable asset within this E-Mode configuration while setting all other assets as Collateral only.
Given the uncertainty of future liquidity given by the ending of the point program, we recommend aligning the E-Mode LTV and LT parameters to the ETH-Correlated E-Mode of Scroll using 90% and 93%, respectively.
Chaos Labs also recommends an additional E-Mode configuration limited to leveraging the wstETH yield with WETH. This is possible thanks to wstETH’s proven reliability across chains, as demonstrated in this proposal.
Again, we recommend aligning the E-Mode parameters to those on Scroll using 93.5% LTV and 95.5% LT and enabling WETH to be borrowable while setting wstETH as collateral.
Specification
Following the above analyses, we have aligned with @LlamaRisk on the following initial parameters for the creation of the Linea deployment:
| WETH | wstETH | ezETH | weETH | WBTC | USDC | USDT | |
|---|---|---|---|---|---|---|---|
| Isolation Mode | No | No | No | No | No | No | No |
| Enable Borrow | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Enable Collateral | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Loan To Value | 80% | 75% | 72% | 72.5% | 73% | 75% | 75% |
| Liquidation Threshold | 83% | 79% | 75% | 75% | 78% | 78% | 78% |
| Liquidation Bonus | 6% | 7% | 7.5% | 7.5% | 7% | 5% | 5% |
| Reserve Factor | 15% | 5% | 45% | 45% | 20% | 10% | 10% |
| Liquidation Protocol Fee | 10% | 10% | 10% | 10% | 10% | 10% | 10% |
| Supply Cap | 1,200 | 800 | 1,200 | 1,200 | 25 | 12,000,000 | 7,800,000 |
| Borrow Cap | 1,100 | 400 | 600 | 600 | 12.5 | 11,000,000 | 7,150,000 |
| Debt Ceiling | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| UOptimal | 90% | 45% | 45% | 45% | 45% | 90% | 90% |
| Base | 0% | 0% | 0% | 0% | 0% | 0% | 0% |
| Slope1 | 2.7% | 7% | 7% | 7% | 7% | 5.5% | 5.5% |
| Slope2 | 80% | 300% | 300% | 300% | 300% | 60% | 60% |
| Stable Borrowing | No | No | No | No | No | No | No |
| Flashloanable | Yes | Yes | Yes | Yes | Yes | Yes | Yes |
| Siloed Borrowing | No | No | No | No | No | No | No |
| Borrowable in Isolation | No | No | No | No | No | Yes | Yes |
| E-Mode Category | Ethereum Correlated | Ethereum Correlated, wstETH/WETH | Ethereum Correlated | Ethereum Correlated | N/A | N/A | N/A |
ETH-Correlated E-Mode
| Parameter | Value | Value | Value | Value |
|---|---|---|---|---|
| Asset | WETH | wstETH | weETH | ezETH |
| Collateral | No | Yes | Yes | Yes |
| Borrowable | Yes | No | No | No |
| Max LTV | 90% | 90% | 90% | 90% |
| Liquidation Threshold | 93% | 93% | 93% | 93% |
| Liquidation Penalty | 1.00% | 1.00% | 1.00% | 1.00% |
wstETH/WETH E-Mode
| Parameter | Value | Value |
|---|---|---|
| Asset | WETH | wstETH |
| Collateral | No | Yes |
| Borrowable | Yes | No |
| Max LTV | 93.5% | 93.5% |
| Liquidation Threshold | 95.5% | 95.5% |
| Liquidation Penalty | 1.00% | 1.00% |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0