[ARFC] Ethereum v3 Supply Cap Update 18.05.2023

[Llamaxyz]

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title: [ARFC] Ethereum v3 Supply Cap Update
shortDescription: Increase the Supply Cap for wstETH and rETH on Aave Ethereum v3
author: @Llamaxyz - @TokenLogic
created: 2023-05-18

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Summary

This publication, inspired by @DecentMuse’s post here, proposes increasing the wstETH and rETH Supply Cap on Aave Ethereum v3.

Abstract

The curent utilisation of wstETH and rETH is 100% and 81.43%. This publication proposes increasing the Supply Caps to enable greater deposits into Aave Ethereum v3.

Motivation

The wstETH Supply Cap has been reached and this is prevents users from entering into the recursive yield maximising strategy which drives a lot of the wETH borrow demand, and thus, revenue to Aave DAO.

With 967.08K units of wstETH deposited in Aave v2, these users are unable to migrate to Aave v3.

This publication proposes to increse the wstETH Supply Cap from 200k units to 400k units. The overal reserve size would still be smaller than Aave v2 current TVL when filled. Further wstETH Supply Caps will be needed to facilitate a full migration of users funds from v2 to v3.

The rETH utilisation is currently over 80% and given the small capacity within the Supply Cap, 3.72M units, this publication seeks to increase the Supply Cap by 50% to 30,000 units. Utiilisation would then be around 54%.This will enable deposits to grow, and like wstETH, the Supply Cap can be rised again later.

Upon reviewing how the rETH deposits are being used, via the Chaos Labs Risk Explorer, a 15% rETH price drop would lead to only $100k of liquidations. Only 4 wallets would be affected and the bad debt estimate was shown as $0.

With reference to the new ARFC Aave V3 Caps update Framework it is possible to ship several upgrades to gradually increasing Aave’s exposure to wMATIC over time.

Specification

The following risk parameters have been proposed by Llama.

Ticker: wstETH

Contract: 0x7f39C581F595B53c5cb19bD0b3f8dA6c935E2Ca0

Parameter	Current Value	Proposed Value
SupplyCap	200,000 units	400,000 units

Ticker: rETH

Contract: 0xae78736Cd615f374D3085123A210448E74Fc6393

Parameter	Current Value	Proposed Value
SupplyCap	20,000 units	30,000 units

Copyright

Copyright and related rights waived via CC0.

[0xkeyrock.eth]

In support of this proposal.

[ChaosLabs]

Chaos Labs supports the proposal to increase the supply caps for rETH and wstETH on V3 Ethereum, with the following modification:

Asset	Current Supply Cap	Recommendation
wstETH	200,000	300,000
rETH	20,000	40,000

Utilizing our supply cap methodology, we conducted stress tests simulating depeg scenarios yielding the results in the graphs below. For wstETH, we recommend a more modest increase in the supply cap than originally proposed.

wstETH:

rETH:

[MarcZeller]

Hello,

With the Aave V3 Caps Update Framework, and since the AIP-234 vote, the Risk Council via the Risk Steward can enforce this kind of proposal.

This proposal has full support from ACI, and there’s community consensus on it.

to limit governance bloating via the excessive amount of low governance-value AIPs votes,

we request the risk steward to enforce these changes.

[Llamaxyz]

Hi @MarcZeller,

Thank you for your support.

If Gauntlet and Chaos Labs are aligned on the proposed parameter changes, this proposal is to be implemented by the Risk Stewards. This was always the intent and has been coordinated as such away from the forum.

Once Gauntlet’s analysis is complete, we will know the next step. We are hoping to have Risk Stewards implement this upgrade in the near future.

[Gauntlet]

Hi @Llamaxyz, we responded on this thread for increasing rETH and wstETH supply caps.