Overview
In light of recent market evolution, Chaos Labs recommends further increasing the Slope 1 parameter to 12.5% and decreasing the Slope 2 parameter for stablecoins across Aave deployments. These adjustments aim to align interest rates with broader market conditions while reducing rate volatility and improving user experience.
Motivation
With the DSR (Dai Savings Rate) and SSR (Sky Savings Rate) recently increased to 11.5% and 12.5%, respectively, we recommend aligning the Slope 1 parameter of Aave stablecoins to maintain competitiveness and align with the rapidly rising market rates. This change reflects the growing demand for leverage over the last months. For example, sUSDe yields—an effective proxy for leverage demand—have surged from approximately 5% in September to 27%. Raising Slope 1 to 12.5% ensures Aave remains attractive to borrowers and suppliers by keeping rates aligned with the broader market.
Simultaneously, reducing Slope 2 addresses the significant rate volatility caused by high stablecoin utilization, as observed over the last month, when utilization spiked above 95%, causing borrow rates to exceed 100%. The rapid filling of sUSDe caps despite such high rates highlights that borrowers are rate-agnostic to ensure a spot in the vault. Lowering Slope 2 mitigates extreme rate spikes, providing a more stable borrowing environment for other users.
We have already mentioned that sUSDe can arguably be viewed as a proxy for leverage demand. Below, we can observe that this demand exploded with the increase in sUSDe supply caps on 11/21 and subsequent, much larger cap increases. sUSDe, entering as collateral in significant amounts from this point onward, constituted almost half of all collateral growth over the entire month and the majority of the growth since its most significant cap increases.
Additionally, these sUSDe market dynamics appear to correlate with stalling growth in other collateral tokens by value. This suggests that the utilization of stablecoin reserves is approaching and exceeding the target rate, leading to marked volatility in interest rates due to the large difference in Slope1 and Slope2 parameters.
By leveraging the UOptimal as a key metric—designed to reflect liquidity availability, market maturity, and supply concentration—we propose setting Slope 2 parameters dynamically based on the market’s UOptimal to ensure a balance between liquidity and rate stability. For markets with an 80% UOptimal, we recommend a Slope 2 of 50%; for 90%, a Slope 2 of 40%; and for 92%, a Slope 2 of 35%.
In the chart below, we observe a clear correlation between rate spikes and the periodic increases in sUSDe caps, with volatility spiking further with more recent larger increases. To illustrate the potential impact of the proposed parameter adjustments, we also simulate the interest rate behavior under similar utilization conditions using the updated parameters.
By combining these adjustments, the proposal ensures that Aave remains competitive, reduces volatility, and balances the borrowing needs of users. The proposed parameters are expected to stabilize borrow rates while continuing to support robust supply growth in stablecoin markets.
Caveats:
- We do not recommend an update to lower-cap stablecoins on Ethereum V2, as they are currently being deprecated.
- We recommend increasing the Slope 1 of bridged USDC (USDC.e/USDbC) by an additional 1% on all deployments. This will give them a higher interest rate to motivate the borrowing of native USDC.
- A concurrent AIP is currently live to increase the Slope1 and Base rate of USDS on Ethereum Core and Prime Instances, and as such, will be left out of the specification.
- Chaos Labs will separately propose a change of interest rate parameters for frozen stablecoins across all instances.
- A concurrent ARFC has already been posted to increase the Slope2 of USDC, USDT, and DAI on the Aave V2 Ethereum instance and as such, will be left out of this Slope2 change
Chaos Labs will closely monitor the market and propose additional changes if needed.
Risk Steward Adjustments
With the recent updates to the Risk Steward framework, Chaos Labs now has the capability to adjust interest rate curve parameters, including Slope 2 and UOptimal, more efficiently without requiring the ARFC governance process. This allow us to respond dynamically to changes in market condition and leverage demand, to better support Aave users.
For example, in anticipation of events such as sUSDe cap increases, we can proactively lower Slope 2 to mitigate rate volatility and prevent unnecessary disruptions for other Aave users. This adjustment ensures smoother borrowing conditions during periods of high inflow, reducing adverse impacts on user experience. Once the inflow subsides and utilization stabilizes, we can promptly readjust the parameters to optimize market efficiency and competitiveness.
This streamlined process strengthens Aave’s ability to adapt to evolving market demands while maintaining a stable and user-friendly ecosystem.
Specification
| Market | Asset | Current Slope1 | Recommended Slope1 | Current Slope2 | Recommended Slope2 |
|---|---|---|---|---|---|
| Ethereum V2 | USDC | 5.5% | 12.50% | 60% | - |
| Ethereum V2 | USDT | 5.5% | 12.50% | 100% | - |
| Ethereum V2 | DAI | 5.5% | 12.50% | 75% | - |
| Ethereum V3 Core | USDC | 5.5% | 12.50% | 75% | 35% |
| Ethereum V3 Core | USDT | 5.5% | 12.50% | 75% | 35% |
| Ethereum V3 Core | USDe | 9.0% | 12.50% | 75% | 50% |
| Ethereum V3 Core | FRAX | 5.5% | 12.50% | 75% | 40% |
| Ethereum V3 Core | DAI | 5.5% | 12.50% | 75% | 35% |
| Ethereum V3 Core | LUSD | 5.5% | 12.50% | 87% | 50% |
| Ethereum V3 Core | PYUSD | 5.5% | 12.50% | 80% | 50% |
| Ethereum V3 Core | crvUSD | 5.5% | 12.50% | 80% | 50% |
| Ethereum V3 Prime | USDC | 5.5% | 12.50% | 60% | 35% |
| Ethereum V3 EtherFi | USDC | 6.5% | 12.50% | 60% | 40% |
| Ethereum V3 EtherFi | PYUSD | 5.5% | 12.50% | 80% | 40% |
| Ethereum V3 EtherFi | FRAX | 5.5% | 12.50% | 80% | 40% |
| Avalanche V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| Avalanche V3 | USDT | 5.5% | 12.50% | 75% | 40% |
| Avalanche V3 | DAI | 5.5% | 12.50% | 75% | 40% |
| Avalanche V3 | FRAX | 5.5% | 12.50% | 75% | 40% |
| Polygon V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| Polygon V3 | USDC.e | 10.0% | 13.5% | 80% | 40% |
| Polygon V3 | USDT | 5.5% | 12.50% | 75% | 40% |
| Polygon V3 | DAI | 5.5% | 12.50% | 75% | 40% |
| Polygon V3 | EURS | 5.5% | 12.50% | 75% | 50% |
| Optimism V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| Optimism V3 | USDT | 5.5% | 12.50% | 75% | 40% |
| Optimism V3 | DAI | 5.5% | 12.50% | 75% | 40% |
| Optimism V3 | sUSD | 5.5% | 12.50% | 75% | 50% |
| Optimism V3 | LUSD | 5.5% | 12.50% | 87% | 50% |
| Optimism V3 | USDC.e | 6.5% | 13.5% | 80% | 40% |
| Arbitrum V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| Arbitrum V3 | USDC.e | 6.5% | 13.5% | 80% | 40% |
| Arbitrum V3 | USDT | 5.5% | 12.50% | 75% | 40% |
| Arbitrum V3 | DAI | 5.5% | 12.50% | 75% | 40% |
| Arbitrum V3 | LUSD | 5.5% | 12.50% | 87% | 50% |
| Arbitrum V3 | FRAX | 5.5% | 12.50% | 75% | 40% |
| Arbitrum V3 | GHO | 12% | 12.50% | 65% | 40% |
| Base V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| Base V3 | USDbC | 10.0% | 13.5% | 80% | 40% |
| Metis V3 | m.USDC | 6.0% | 12.50% | 60% | 40% |
| Metis V3 | m.USDT | 6.0% | 12.50% | 75% | 40% |
| Metis V3 | m.DAI | 7.0% | 12.50% | 75% | 50% |
| BNB Chain V3 | USDT | 5.5% | 12.50% | 75% | 40% |
| BNB Chain V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| BNB Chain V3 | FDUSD | 5.5% | 12.50% | 75% | 40% |
| Scroll V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| Gnosis V3 | WXDAI | 5.5% | 12.50% | 75% | 40% |
| Gnosis V3 | USDC | 5.5% | 12.50% | 75% | 40% |
| Gnosis V3 | EURe | 5.5% | 12.50% | 75% | 50% |
| Gnosis V3 | USDC.e | 9% | 13.5% | 75% | 40% |
| ZKSync V3 | USDC | 5.5% | 12.50% | 60% | 40% |
| ZKSync V3 | USDT | 5.5% | 12.50% | 60% | 40% |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
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