[ARFC] Lido Instance - wstETH Slope1 & Uoptimal Update

[karpatkey_TokenLogic]

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title: [ARFC] Lido Instance - wstETH Slope1 & Uoptimal Update
author: @karpatkey_TokenLogic
created: 2024-09-16

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Summary

This publication proposes improving the capital efficiency of the wstETH Reserve on the Lido instance of Aave v3 on Ethereum by increasing Uoptimal from 45.00% to 80.00% and reducing the Slope1 from 3.50% to 2.25%.

Motivation

This proposal recommends revising the wstETH borrow rate ahead of the introduction of Liquid Restaking Tokens (LRTs) and the creation of several new eModes on the Lido instance of Aave v3 on Ethereum.

The upcoming Liquid eModes upgrade will allow a single asset to be included in multiple eModes. As we onboard various LRTs, our goal is to promote the use of wstETH as a debt asset to enhance the returns of the wstETH/wETH yield strategy.

By increasing the Uoptimal of the wstETH reserve, we can significantly improve its capital efficiency. Strategists using LRTs as collateral and borrowing wstETH to generate yield will be able to borrow a larger portion of the wstETH that in turn generates a wstETH deposit yield.

The wstETH deposit yield will offset the wETH borrowing costs. Depending on market conditions, this could lead to a future proposal that fine-tunes the wETH and wstETH Slope1 parameters to balance the wETH deposit yield, revenue, and the performance of the wstETH/ETH yield strategy. Optimizing these parameters is expected to significantly reduce the payback period on the Lido instance and improve the DAO’s overall return on investment.

A separate proposal will provide details on the new eMode configurations being introduced to the Lido instance of Aave v3. This publication focuses specifically on optimizing the wstETH Uoptimal to improve capital efficiency in preparation for LRT onboarding.

Whilst several teams are expected to offer incentives for strategies involving LRT collateral and wstETH debt, general market conditions are not sufficiently buoyant to support retaining the current 3.50% Slope1 parameter.

Whilst we expect strong demand for wstETH debt from users wanting to leverage farm LRT point incentives. Our research indicates sufficient demand emerges when the Slope1 is within the 2.00% to 2.50% range. As a result, this publication proposes reducing the Slope1 from 3.50% to 2.25%.

By revising the Slope1 and Uoptimal configuration for the wstETH reserve, we expect LRT deposits to drive significant AUM growth for the Lido instance.

Specification

The Lido instance wstETH Slope1 and Uoptimal are to be revised as follows:

Description	Current	Proposed	Change
Slope1	3.50%	2.25%	-1.25%
Uopitimal	45.00%	80.00%	35.00%

Disclosure

TokenLogic and karpatkey receive no payment for this proposal. TokenLogic and karpatkey are both delegates within the Aave community.

Next Steps

1. Gather feedback from the community.
2. If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
3. If Snapshot outcome is YAE, an AIP will implement proposal.

Copyright

Copyright and related rights waived via CC0.

[Dalaydefi]

Hello , I am a happy AAVE user , I just wanted to ask something if possible.
What is the reason for the big difference between WSTETH AND WEETH
RF and U-optimals

[ChaosLabs]

Chaos Labs supports this proposal, finding the proposed change to Slope1 and UOptimal effective in improving the capital efficiency of the wstETH Reserve of Aave v3 Lido instance on Ethereum.

Motivation

The proposal recommends updating wstETH’s Slope1 and UOptimal, decreasing Slope1 from 3.50% to 2.25%, and increasing the UOptimal from 45% to 80%.

To evaluate the change in Slope1 we consider ezETH as a reference point for a future LRT listing on the Aave v3 Lido instance. We use the Pendle market to price the currently running points program. Given that Renzo currently boosts the ezPoints on Pendle deposits by 2x, we assume that the points accrued are valued:

Using this, we found that the expected APR from points alone on ezETH dropped to a low of 0.5% during a spike in APR from wstETH but remained stable around 2% at other times.

When analyzing steakLRT, we found that the expected APR from points alone on steakETH dropped to a low of 3% toward the end of July.

Based on Chaos Labs’ methodologies, lowering Slope1 to 2.25% optimally aligns with the goal of incentivizing borrowing.

When evaluating the current wstETH suppliers for the UOptimal change, we see that supply is heavily concentrated in the top 4 wallets in the Lido instance on Ethereum, with the largest wallet holding 22% of the total wstETH supply. However, since the borrowed asset is highly correlated to the collateral, the position poses very minimal risks of liquidation.

The situation is similar on Ethereum’s main instance, with the top user providing 10.5% of the supply of wstETH.
Given the highly leveraged nature of the positions on the Lido instance, the proposed UOptimal of 80% provides a sufficient buffer for withdrawals and liquidation events.

[LlamaRisk]

LlamaRisk endorses this proposal. The Lido Aave V3 instance aims to provide a more optimized and capital-efficient venue for leverage looping Lido-related assets. This necessitates more aggressive parameters, made possible by (1) the segregation of this instance from the main instance and (2) the use of correlated assets with a CAPO-enabled internal exchange rate. The success of LRT onboarding into the Lido instance hinges on LRT/wstETH leverage-looping profitability. The proposed changes to Slope1 and uOpt for wstETH are expected to boost demand and capital influx, enhancing the overall efficiency of the Lido instance.

Two use cases for the Lido instance:

• wstETH/WETH leverage looping: Deposit wstETH, borrow WETH, leverage-loop into Lido. Current demand exceeds WETH supply: 87.21% utilization (near 90% uOptimal), 15% supply cap.
• LRT/wstETH leverage looping: Not yet available (LRT yet to be onboarded). Future usage: deposit LRT, borrow wstETH, leverage-loop into LRT protocol. Current wstETH borrow utilization: 0.07%, supply at 15.34% of cap.

Foreseen effect of this change (post-LRT onboarding):

1. Increased LRT/wstETH leverage-looping demand (LRT deposits incentivized).
2. Higher wstETH borrowing demand, leading to:
   a. Increased wstETH supply rate
   b. Lower wstETH/WETH leverage-looping costs
   c. More wstETH deposits in Lido instance

[karpatkey_TokenLogic]

This proposal has been progressed to Snapshot.

Link: here

Start date Sep 25, 2024, 9:16 PM
End date Sep 28, 2024, 9:16 PM

Thank you in advance for participating in the vote.