Based on current demand levels, the ACI does not recommend any modifications to the asset borrow cap.
The ACI supports the addition of cbETH to the Aave emode, and this ARFC should be considered as part of that process. However, more market data history on V3 is needed before making any modifications, and the ACI is not proposing any changes at this time on this front.
Recent events with Paxos and BUSD may raise concerns in the community regarding cbETH and Coinbase. The ACI’s current position is that in the event of a similar SEC action, Coinbase will allow the redeeming of cbETH after the shanghai upgrade according to the withdraw queue. This scenario is not expected to pose a significant risk of depeg, and therefore the ACI considers it an acceptable risk to increase the cbETH supply cap.
From a market risk perspective and utilizing our supply and borrow cap methodology, Chaos Labs supports the 20K supply cap and no change to the borrow cap.
Hi @MarcZeller, thanks for the post! Had a question around this:
Following the SEC’s actions, the ACI believes that Coinbase will allow cbETH redemption after the Shanghai upgrade if there is a similar SEC action on cbETH. However, 1) it isn’t confirmed the Shanghai upgrade is due to occur and 2) the withdraw queue may be pretty long.
What is the risk of a depeg and of increasing this supply cap to Aave? And on the other hand, of not increasing the supply cap and leaving it at the current level until there is more clarity in the market around Coinbase’s products from a regulatory perspective and the Shanghai upgrade dates?
From a market risk perspective, Gauntlet supports 20k supply cap for cbETH.
According to our modeling, cbETH would need a ~25% price deviation for debt to start becoming insolvent.
We’d like to bring up the following point to consider, as it may affect the community’s decision -
If emode is enabled for cbETH before the proposed 20k supply cap is reached, then the asset’s risk profile may change. If the community has a particularly conservative risk tolerance (e.g., if the community wants to discount CEX liquidity heavily), then the community may wish to support a smaller supply cap increase to 15k initially.
According to recent calls from ACD, there’s no particular reason not to expect Shanghai to happen on the mainnet sometime around April 2023. Devnet upgrades are a success, and testnet upgrades are being rolled out. The EF is putting all effort to maintain its deadline, and for once, there’s a consensus on its ability to deliver on time.
LSDs are liquid, so anyone wishing to “unstake” can do it now on secondary markets. The majority of currently staked ETH is more or less liquid as of today. In my humble opinion, there’s no particular reason to predict a long withdrawal queue when Shanghai is implemented. It is more likely that the staking queue will be longer as many are waiting for this upgrade to actually start staking.
It all boils down to a risk/reward calculation for Aave. LSDs are very strategic assets and allow V3 emode to shine. The current cap being hit indicates that market demand is strong. Our position at the ACI is that the current cap increase is a consensus between being slightly conservative and allowing growth. Aave is not the only actor to allow cbETH collateral, so it’s likely that the current cap is favoring other protocols more than Aave at the moment.
Regarding the “regulatory perspective,” I’ve stated my opinion that has zero legal value several times. The worst-case scenario is what happened with BUSD - no more minting and a period to allow redemption. That scenario is not particularly concerning for the peg or Aave in general. If that happens, the ACI will be supportive to freeze cbETH reserve and move on.
The ACI would like to open the discussions about adding cbETH to emode after the current proposal maturity, happy to discuss with risk teams to prepare this upcoming ARFC.