[ARFC] Lido Instance - Reduce wstETH Borrow Cap

[ACI]

title: [ARFC] Lido Instance - Reduce wstETH Borrow Cap

author: @ACI

created: 2024-09-12

---

Summary

Reduce wstETH Borrow Cap from 12,000 to 100 in preparation for wstETH deposit incentives.

Motivation

With the upcoming implementation of wstETH deposit liquidity mining rewards, this proposal suggests reducing the wstETH Borrow Cap to prevent recursive looping of wstETH deposits.

If liquidity mining rewards are added to wstETH deposits, we may see users looping wstETH/wstETH to farm the rewards. This could lead to the dilution of wstETH deposit rewards, and with low utilization of the wstETH reserve, the strategy will be less effective in encouraging users to engage in the wstETH/wETH yield-maximizing strategy.

To mitigate this risk, we propose reducing the wstETH Borrow Cap to levels near current utilization.

When the first Liquid Restaking Token (LRT) is added to the Lido instance, the Borrow Cap will be increased, and wstETH deposit rewards will taper off or stop. We expect this to coincide with external teams providing deposit incentives for their respective LRTs.

A separate proposal will outline changes to the wstETH Borrow Rate to encourage wstETH as the preferred debt asset for yield strategies utilizing LRTs as collateral.

Specification

Reduce Borrow Cap for wstETH reserve from 12,000 to 100 wstETH.

When the first LRT is onboarded, the wstETH Borrow Cap will be increased to 12,000 as part of the asset onboarding AIP submission.

Disclosure

ACI received no payment for this proposal. ACI and employees hold stETH.

Next Steps

1.If supported by Chaos Labs, the Risk Stewards will implement this proposal.

Copyright

Copyright and related rights waived via CC0.

[ChaosLabs]

Chaos Labs supports this proposal, finding it the most effective and simple strategy to eliminate the possibility of wstETH-wstETH looping. Consistent with other deployments, we have observed limited borrow demand for wstETH in the Lido instance.

While there are other options to reduce the likelihood of looping, such as adjusting wstETH’s IR curve and Reserve Factor, we find that reducing its borrow cap is the most straightforward and effective option. Additionally, we support increasing the borrow cap back to its current level if and when an LRT is onboarded, as this may increase wstETH borrow demand.

[LlamaRisk]

LlamaRisk also reviewed and supports this proposal. It is both simple and effective. Tapering off the incentives through time will be beneficial to prevent the supply from leaving as soon as the incentives subside.