Overview
Chaos Labs supports listing ezETH on Aave V3 Arbitrum and Base instances. Below are our analysis and initial risk parameter recommendations, as well as two new Liquid E-Modes for the asset.
Following the extensive analysis of the asset that was done in this thread, this analysis will focus solely on the differences of the asset on Arbitrum and Base chains.
Supply and Market Cap
Currently, ezETH has a total TVL of 330K ETH, down from a high of 1M ETH when withdrawals were opened in mid-June but up from a low of 287K ETH right before its listing in the Aave v3 Lido instance. Since its launch, it has had a daily trading volume of $50.5M across all chains.
Its respective versions on Layer 2 are minted by locking ezETH in the bridge contract on the Ethereum side.
The supply of ezETH on Arbitrum is currently 19,300 after a sharp drop following the opening of the withdrawals.
The supply of ezETH on Base is currently 3,700 and has grown significantly since having been listed on Base.
Liquidity
The price impact of selling ezETH on Arbitrum has remained consistent over the last 60 days, which indicates a sticky liquidity on the chain. The liquidation under a 1% price impact has been consistently around 700 WETH.
Similarly, the liquidity on Base has somewhat stabilized over the last 60 days, with roughly 400 ETH of buy liquidity available and a TVL of $2.6M.
ezETH / ETH Volatility
ezETH exhibits modest volatility compared to ETH as it has decreased recently, with the 30-day annualized volatility at 1.93%, down from 6.2% over a 180-day period. The biggest price drop relative to ETH in the last 180 days has been 2.79%.
Its peg on Ethereum has been tightening recently after compounded rewards were included in the underlying asset APY. After the creation of ezETH/wstETH E-Mode on the Lido instance, the asset was traded at a slight premium even though its deposits were enabled and atomic, as the demand for looping was routed through DEX liquidity rather than protocol deposits.
Further analysis of the behavior of the asset during August 5th shows how its peg reacts to market stress. On Base, the asset deviated from its peg by up to 0.8%, and it was slow to return to its original price as it only happened through the following days. This is likely caused by thin liquidity at the time and the lack of active withdrawals.
ezETH depeg on Base on Aug 5th
We observed a similar reaction to Arbitrum, although the asset saw significantly more trading and arbitrage events and returned close to its previous day’s price within the day. Overall, the biggest deviation against its Exchange Rate was 1%
ezETH depeg on Arbitrum on Aug 5th
LTV, Liquidation Threshold, and Liquidation Bonus
Considering ezETH’s consistent liquidity and modest volatility compared to ETH, we recommend setting parameters equal to those recommended for Ethereum Main instance. Hence, we recommend an LT of 75%, an LTV of 72%, and a Liquidation Bonus of 7.5%.
Interest Rate curve
Given its similarity with its Ethereum counterpart, we recommend adopting the same interest rate curve parameters.
E-mode
Given the recent addition to Aave v3.2 of Liquid E-Modes, we recommend including ezETH in both the ETH-Correlated E-Mode of the respective chain and in a separate ezETH/wstETH E-Mode.
For the reasons described in this post, we recommend aligning the ezETH/wstETH E-mode parameters with the ones on the Lido instance.
Supply and Borrow Cap
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, on Arbitrum we recommend an initial supply cap of 1,750 ezETH.
On Base, we recommend an initial supply cap of 1,200 ezETH.
Given limited historical demand for similar ETH-derivative assets — wstETH excluded given its use as borrow against ezETH — we recommend setting the borrow cap at 10% of the supply cap.
Pricing ezETH
Since native withdrawals have been open, the asset has shown a tendency to trade closely around and quickly revert to its fundamental underlying value during large market downturns. Hence, we recommend using a calculated oracle based on its exchange rate.
Recommendations
Following the above analysis, we recommend the following parameter settings:
| Parameter | Value |
|---|---|
| Chain | Arbitrum |
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap | 1,750 |
| Borrow Cap | 175 |
| 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, ezETH/wstETH |
| Parameter | Value |
|---|---|
| Chain | Base |
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap | 1,200 |
| Borrow Cap | 120 |
| 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, ezETH/wstETH |
CAPO
Following the analysis in this post, we recommend using a 14-day MINIMUM_SNAPSHOT_DELAY and a maxYearlyRatioGrowthPercent of 10.89%.
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 10.89% | monthly | 14 days |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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