[ARFC] Polygon & Arbitrum v3 Supply Cap Update 19.05.2023

[Llamaxyz]

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title: [ARFC] Polygon & Arbitrum v3 Supply Cap Update 19.05.2023
shortDescription: Increase the Supply Cap for wstETH on Aave Polygon and Arbitrum v3
author: @Llamaxyz - @TokenLogic
created: 2023-05-19

---

Summary

This publication proposes increasing the wstETH Supply Cap on Aave Polygon and Arbtirum v3.

Abstract

The current utilisation of wstETH 100% on Arbitrum v3 and up to 75% of wstETH supply on Polygon. The previous supply cap increase was filled within minutes by users predominately using multiples types of collateral and borrowing wETH

Do to the nature of how users are interacting with the Aave Protocol, his publication proposes increasing the Supply Caps to enable greater deposits by the maximum amount following the risk methodologies shared on the governance forum.

Motivation

The wstETH Supply Cap on Polygon and Arbitrum has been reached within minutes of the previous AIP being executed on each respective network.

In response to the strong demand for wstETH deposits, this proposal seeks to increase the Supply Caps by the maximum amount. ie: Doubling both Supply Cap on Arbtirum and up to 75% of supply on Polygon.

The user who deposited into the Arbitrum wstETH reserve, holds only wETH nominated debt.

Wallet: arbitrum: 0xccfa0530b9d52f970d1a2daea670ce58e4176389

The largest holding that was deposited into the wstETH on Polygon is holding wETH debt with mixed collateral types.

Wallet: polygon: 0x1DC6074361a3cddEe55A61C92BCf7dE1667e1096

The second largest deposit acted very similar to the above. Multiple types of collateral and wETH nominated debt.

As users are entering yield maximising strategies, Aave DAO is able to pursue more aggressive Supply Cap increases, up to 75% of circulating supply on the repsective network. The Polygon wsETH Supply Cap is limite by wstETH supply which is 4,748.50 units.

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.

Arbitrum

Ticker: wstETH

Contract: arbitrum: 0x5979d7b546e38e414f7e9822514be443a4800529

Parameter	Current Value	Proposed Value
SupplyCap	9,300 units	18,600 units

Polygon

Ticker: wstETH

Contract: polygon: 0x03b54a6e9a984069379fae1a4fc4dbae93b3bccd

Parameter	Current Value	Proposed Value
SupplyCap	2,400 units	3,565 units

Copyright

Copyright and related rights waived via CC0.

[pcx]

Is this screenshot from the user’s UI ?
Or any tool can show such view?

[gohawi8287]

I would like to see this increased but:

1. There is nothing stopping these users from paying back their ETH and then taking USD/other denominated assets meaning we’ve got a high supply cap and the risk is increased.
2. I don’t believe that using the supply on a given network provides any solid risk analysis here given that the 4650 wstETH on Arbitrum was bridged from Ethereum 2 days before this passed.

On the second point it feels somewhat like a fools errand to be basing limits using the circulating supply on a network given that it is so easy for any user to increase or decrease this supply by bridging. Available liquidity feels like the better metric for derivation of the cap.

Personally I’m desparate to see this limit be increased as much as possible but I believe there should be two supply caps, one for ETH denominated borrowing (which basically will never be liquidated) and another for BTC/USD.

[Llamaxyz]

Hi @pcx,

On the top right corner of the Aave UI, select connect wallet and then in the pop up box enter the address where it says read only. This always anyone to see how another wallet is interacting with Aave Protocol via the dashboard tab.

[pcx]

Thanks @Llamaxyz .

Now the question is how we can prevent such whale’s action after this new proposal is passed.

[Llamaxyz]

Hi Everyone,

If we can learn @ChaosLabs and @Gauntlet’s views on the proposed Supply Cap increases mentioned above, this would be another great opportunity to utilise the new Risk Steward role to implement the upgrade.

[ChaosLabs]

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

Network	Asset	Current Supply Cap	Recommendation
Arbitrum	wstETH	9,300	15,000
Polygon	wstETH	2,400	4,050

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.

Polygon

For wstETH on Polygon, we recommend capping the supply cap at 75% of the on-chain circulating supply as voted on by the community (currently 5,400)

Arbitrum

On Arbitrum, with current liquidity, our depeg stress case scenarios show a risk of protocol losses given a range of increases in supply. Although the scenarios are relatively conservative (depeg up to 15%), we recommend a more modest increase of the cap by 1.6X.