Gauntlet recommends increasing WETH Reserve Factor from 15% to 20% in the v3 Ethereum market.
Motivation
In v3 Ethereum, WETH has $1.1 billion in borrows, primarily against WETH LSTs. With a 15% Reserve Factor and a 2.35% Borrow APR, WETH generates an annual reserve growth of $3.87 million. With a 75% utilization rate, the WETH Supply APR stands at 1.50%. Increasing the Reserve Factor from 15% to 20% would increase annual reserve growth by 33%, adding an extra $1.29 million yearly, assuming supplier retention. This adjustment would minimally decrease the Supply APR from 1.50% to 1.41%.
Most WETH suppliers leverage their collateral for stablecoin borrows, showing a low sensitivity to slight drops in Supply APR due to their focus on WETH LTV/LT and higher stablecoin borrow APRs. Additionally, WETH uOptimal is 90% and current utilization is 75%, offering a large buffer if some WETH supply were to leave the protocol.
This scenario offers an excellent chance for the protocol to amplify reserve growth. Observing user response to this change could allow further Reserve Factor increases to focus on enhancing reserves for the highly-borrowed LST base assets on Ethereum and other markets.
Specification
Chain
Asset
Current Reserve Factor
Recommended Reserve Factor
Ethereum v3
WETH
15%
20%
Next Steps
Welcome community feedback and will put up a snapshot next week.
Disclaimer
Gauntlet has not received any compensation from any third-party in exchange for recommending any of the actions contained in this proposal.
By approving this proposal, you agree that any services provided by Gauntlet shall be governed by the terms of service available at gauntlet.network/tos.
I would be quite disappointed of such an RF increase to 20% … I was expecting a RF decrease to 10% targeting a better competitive advantage on LST loops.
What is the reserve requirement justifying such revenue increase ? Any foreseen situation ?
Is this related to any recurring service provider cost discussion ?
The Current avg RF Market rate is at 5% for wETH in the DeFi Landscape.
Raising even more the wETH RF while governance has already pre-approved a decreased RF to 10% may seem a weird proposal from Gauntlet.
Just like refusing to raise the MaticX Cap via the risk steward forcing wasted time & focus to going through an AIP snapshot & vote to allow Aave Growth seem confusing too.
We would like to remind Gauntlet they work for the Aave protocol, and they’re mostly on the Aave protocol Payroll.
I want to summarize how I interpret this decision:
Increasing WETH Reserve Factor by 5%, decreasing Supply APR from 1.5% to 1.41%.
Justification being:
increase reserve growth (risk prevention)
WETH suppliers wouldn’t care
utilization is lower than optimal, meaning if WETH supply exits, utilization would not be too high
However, I am unconvinced that this increase in reserves is necessary. A 15% RF is plenty enough compared to competitors.
Also, Borrow and Supply of WETH has steadily increased over time, and substantially increasing the RF (from the pre-approved 10% Marc referenced to 20%) may deter suppliers and subsequently, users from using Aave over others.
I agree in the sentiment that “while the market is healthy we should proactively deal with risk” but I find this increase arbitrary.
TLDR - our models identified this as an opportunity to increase reserve growth, which would provide further backstop to insolvency risk, while minimally affecting user experience
We understand the concern around how the increased RF may result in reduced WETH Supply. Gauntlet is cognizant of this possibility. The results of our analysis show that it is unlikely for WETH Supply to reduce meaningfully
Most WETH suppliers leverage their collateral for stablecoin borrows, showing a low sensitivity to slight drops in Supply APR due to their focus on WETH LTV/LT and higher stablecoin borrow APRs
Additionally, WETH uOptimal is 90% and current utilization is 77%, meaning $190M WETH supply would have to leave the protocol before WETH utilization hits the kink. Even with a slightly increased Reserve Factor, equilibrium would reestablish well below the kink to result in the less-diluted supply APR being the same as it currently is
Assuming the same Supply Rate, an increased RF does not result in higher Borrow Rates. Thus, borrowers using the looping strategy would not be impacted negatively. An increased RF just means less interest accruing to suppliers
Our assumption is that more protocol reserves are better than less protocol reserves
The community may prioritize user experience over this opportunity to increase reserve growth by $1.29 million yearly. Given the feedback here, Gauntlet will not move forward with our recommendations.
