We welcome the increase in Uoptimal and reduction in Slope2 parameter which increase the capital efficiency of the wETH Reserve on Prime.
However, we do note, that upon wETH/wETH looping positions are removed, wETH should be re-enabled as collateral. Enabling wETH as collateral prior around the time liquidity mining rewards are to finish is key for retaining the wETH deposits. Without collateral status and no LM rewards, the wETH deposits are more likely to leave Prime due to the perceived opportunity cost than if wETH can access stablecoin liquidity.
The additional 2% Uoptimal increase will be absorbed quickly, due to several teams actively looking for capacity on the Prime instance. The wstETH/wETH yield maximising looping is more economical on Prime than any other instances of Aave or other large liquidity venue in DeFi.
Even with wstETH Slope1 being reduced, the current wETH Slope1 parameter can be raised and optimised further. Another 20-30 bps increase in the wETH Slope1 parameters enables LM rewards to be lowered by a matching amount, improve the revenue being generated from the reserve, whilst still allowing Aave to offer a better yield opportunity than its competitors.