Overview
Chaos Labs supports listing ezETH on Aave V3 Ethereum — Lido as part of the community’s strategy to increase the LST/LRT offerings supported by Aave. Below is our analysis and initial risk parameter recommendations.
Note: The following analysis is conducted solely from a market risk viewpoint, excluding centralization and third-party risk considerations. If the community aims to reduce exposure to ezETH, adopting more conservative parameters should be considered.
Liquidity and Market Cap
Currently, ezETH has a TVL of 500K ETH, down from a high of 1M ETH when withdrawals were opened in mid-June. Since launch, it has a daily trading volume of $83.4M.
ezETH / ETH Volatility
Relative to ETH, ezETH has a daily annualized volatility of 7.03% over the last 180 days and 2.16% over the last 30 days. Its maximum price drop relative to ETH was 2.79% over the former time frame.
LTV, Liquidation Threshold, and Liquidation Bonus
Considering ezETH’s volatility and correlation to ETH, we recommend setting the LTV to 72% and the LT to 75%.
Given ezETH’s liquidity, volatility, and historical depegs, we recommend a liquidation penalty of 7.5%, ensuring that liquidating non-WETH ezETH-collateralized positions are profitable to liquidate even in times of stress.
E-mode
We recommend including ezETH in the ETH-correlated E-mode category.
Supply Cap, Borrow Cap, and Liquidation Bonus
Following Chaos Labs’ approach to initial supply caps, we propose setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact.
Thus, we recommend a supply cap of 7,000 ezETH. While circulating supply has fallen, it would have to fall to 9.5K to break the community-voted rule of not setting supply caps over 75% of an asset’s on-chain supply. Additionally, we find it likely that there will be an element of induced demand, wherein users are more likely to hold the asset following its availability on Aave.
Given limited historical demand for similar ETH-derivative assets — weETH excluded given incentives that encourage borrowing — we recommend setting the borrow cap at 10% of the supply cap.
Pricing ezETH
Native withdrawals of ezETH have been open for a sufficient time, and it has shown to mean revert rapidly enough to recommend pricing ezETH using a calculated oracle based on its exchange rate. For example, during the August 4 price decline, ezETH fell to 0.86 WETH on its most liquid pair on Ethereum. However, by the next block, its price had risen to 0.99 WETH; 30 minutes later, it had reverted to a 44bps discount. Ultimately, this proved to be an outlier, as its market oracle reached a low of only 0.992 ETH.
Pool Selection
We find limited additional risk posed by allowing ezETH to be listed on the core Aave V3 Ethereum instance. Additionally, this may be preferable, given that 7 of the 10 largest WETH suppliers on the core instance are borrowing against their WETH. As mentioned in our previous response to the Lido instance, attracting WETH supply while limiting its borrowable assets and borrowing power will likely require WETH supply incentives in perpetuity unless the composition of available assets and WETH’s borrowing power changes. However, should the community be comfortable with this paradigm, we note that the Lido instance does carry slightly more lenient parameters in E-Mode, allowing for higher leverage looping. We note that our parameter recommendations below apply for listing the asset in either the Lido instance or the core instance, with the exception of its E-Mode parameters, which will be aligned according to the instance: 93.5% LTV and 95.5% LT on Lido; 93% LTV and 95% LT on core.
Recommendations
Following the above analysis, we recommend the following parameter settings:
| Parameter | Value |
|---|---|
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap | 7,000 |
| Borrow Cap | 700 |
| Debt Ceiling | - |
| LTV | 72% |
| LT | 75% |
| Liquidation Penalty | 7.5% |
| Liquidation Protocol Fee | 10.00% |
| Variable Base | 0.0% |
| Variable Slope1 | 7.00% |
| Variable Slope2 | 300.00% |
| Uoptimal | 45.00% |
| Reserve Factor | 15.00% |
| Stable Borrowing | Disabled |
| Flashloanable | Yes |
| Siloed Borrowing | No |
| Borrowable in Isolation | No |
| E-Mode Category | ETH-correlated |
CAPO
We recommend a maxYearlyRatioGrowthPercent of 7.39% for ezETH, with a MINIMUM_SNAPSHOT_DELAY of 7 days. This recommendation is based on the frequent occurrence of rate distributions and relatively minimal rate variance observed over time, as seen in the plot below.
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 7.39% | monthly | 7 days |