[ARFC] Onboard sUSDe, USDe and weETH to Aave v3 on zkSync

[ACI]

[ARFC] Onboard sUSDe, USDe and weETH to Aave v3 on zkSync

Author: ACI

Date: 2024-09-26

Risk Parameters have been updated after being provided by Risk Service Providers. 2024-04-10

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Summary

This proposal aims to onboard sUSDe, USDe, and weETH to the Aave v3 protocol on zkSync. This follows the original plans for further expansion on the network.

Motivation

The integration of sUSDe, USDe, and weETH into Aave v3 on zkSync is following the intitial plan for the zkSync network launch. With the successful launch of Aave v3 on zkSync, and some time for monitoring, we believe it is time to start expanding from the initial asset list.

These onboardings also include partnership with Ethena and EtherFi to add ZK token incentives to each market, which will contribute to Aave’s growth on zkSync.

Proof of Liquidity and Deposit Commitments

Aave DAO received an allocation of ZK during the network’s TGE. Ethena and EtherFi have both pledged to add additional incentives from their own ZK token allocations. These incentives will be used to grow the market with ACI acting as Emissions Manager.

Specification

Risk Parameters have been provided by Risk Service Providers and this ARFC has been updated based on their assessment. 2024-10-04

Parameter	weETH	USDe	sUSDe
Isolation Mode	No	Yes	Yes
Borrowable	Yes	Yes	No
Collateral Enabled	Yes	Yes	Yes
Supply Cap	300	500,000	400,000
Borrow Cap	150	50,000	-
Debt Ceiling	-	$500,000	$400,000
LTV	72.5%	65%	65%
LT	75%	75%	75%
Liquidation Bonus	7.5%	8.5%	8.5%
Liquidation Protocol Fee	10%	10%	10%
Variable Base	0%	0%	-
Variable Slope1	7%	9%	-
Variable Slope2	300%	75%	-
Uoptimal	30%	80%	-
Reserve Factor	45%	25%	20%
Stable Borrowing	Disabled	Disabled	Disabled
Flashloanable	Yes	Yes	Yes
Siloed Borrowing	Disabled	Disabled	Disabled
Borrowable in Isolation	No	No	No
E-Mode Category	ETH-correlated	-	-

Disclaimer

This proposal is powered by Skywards. ACI is not directly affiliated with Ethena or EtherFi and did not receive compensation for creation this proposal. ACI is a delegate in EtherFi. ACI and its members hold weETH.

Next Steps

1. If consensus is reached on this [ARFC], escalate this proposal to the Snapshot stage.
2. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal

Copyright

Copyright and related rights waived under CC0

[LlamaRisk]

Summary

Llamarisk supports onboarding USDe, sUSDe, and weETH on the zkSync market. These assets would be onboarded not only to the Aave v3 zkSync market but also to the whole network, as the liquidity for all three tokens is non-existent. Liquidity levels are expected to grow as the market is planned to be incentivized. Further market growth would then be made possible by applying the same aggressive supply cap growth methodology as Aave is currently using to bootstrap and grow other L2 markets (and networks themselves), namely Scroll and Base. This methodology has been evaluated by Llamarisk, as outlined in our recent reports: 1, 2.

Detailed evaluation

Current state of Ethena

After growing to $3.6B of TVL, Ethena protocol has declined these past two months. The TVL at the time of writing is now $2.6B, which is rational given current market conditions and associated lower funding rates. In addition to BTC and ETH perpetuals, Ethena introduced SOL as a perpetual futures trading asset and will introduce an RWA asset (UStb collateralized by Blackrock’s BUIDL fund) to benefit during periods of weak funding conditions. This will help further diversify the risk and increase scaling opportunities regarding open interest.

Ethena has also recently introduced an initial phase of governance, onboarding risk providers to govern different risk parameters, such as reserve fund capitalization, liquid redemption buffer, take rates, collateral allocation between different CEX, etc. LlamaRisk is also part of this risk council and has covered different pain points of the protocol in a dedicated Ethena research.

Given this consolidation of the project and the necessity to first introduce liquidity to the network, we believe USDe and sUSDe should be onboarded with the same set-up as in other Aave markets, only with a lower TVL as an initial measure until liquidity is bootstrapped and reaches adequate levels.

weETH Considerations

Presently, weETH liquidity on the zkSync network is notably scarce. However, a similar LST asset, wstETH, has already been onboarded to the market with conservative initial caps.

Current market parameters for wstETH on Aave v3 zkSync. Source: Aave, 30th of September, 2024

Similar borrow/supply caps and Mainnet market parameters could be used for weETH as an initial set-up.

Aave V3 Specific Parameters

The parameters were coordinated with @chaoslabs and are the following:

Parameter	weETH	USDe	sUSDe
Isolation Mode	No	Yes	Yes
Emode	ETH Correlated	No	No
Borrowable	Yes	Yes	No
Borrowable in Isolation	No	No	No
Collateral Enabled	Yes	Yes	Yes
Stable Borrowing	No	No	No
Supply Cap	300	500,000	400,000
Borrow Cap	150	50,000	n/a
Debt Ceiling	N/A	500,000	400,000
LTV	72.5%	65%	65%
LT	75%	75%	75%
Liquidation Bonus	7.5%	8.5%	8.5%
Liquidation Protocol Fee	10%	10%	10%
Reserve Factor	45%	25%	20%
Base Variable Borrow Rate	0%	0%	n/a
Variable Slope 1	7%	9%	n/a
Variable Slope 2	300%	75%	n/a
Uoptimal	30%	80%	n/a

A 10% buffer between LT and LTV has been applied for USDe and sUSDe to further reduce risks during this bootstrapping phase.

Note: This assessment follows the LLR-Aave Framework, a comprehensive methodology for asset onboarding and parameterization in Aave V3. This framework is continuously updated and available here.

Price feeds

Price feeds for all these assets on the zkSync network have been created and are made available by Chainlink:

1. USDe / USD Market Rate feed: 0x4899faF0b6c36620168D00e3DbD4CB9361244c4d
2. sUSDe / USDe Exchange Rate feed: 0x97920183c36B022B46D6C14b9dA36c5f31A98C6A
3. weETH / eETH Exchange Rate feed: 0x8D3184a992f93729b249407C33F1e78abE0d650e

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded partly by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

[ChaosLabs]

Overview

Chaos Labs supports listing weETH, USDe, and sUSDe on Aave V3’s zkSync deployment. Below are our analyses and initial risk parameter recommendations.

zkSync Liquidity

sUSDe/USDe

Using the token addresses provided in Ethena’s documentation, we find that there have been just 22 transactions involving USDe on zkSync; there has been just one involving sUSDe, both according to explorer.zksync.io.

sUSDe

USDe

However, we note that incentives are planned and thus supply is expected to increase rapidly. We recommend conservative parameters given the state of these assets.

weETH

Using the contract (0xc1…) provided on Ether.fi’s documentation, we find that weETH has 434 transactions according to zkSync’s explorer, 178 holders, and a total supply of 752 weETH according to Blockscout.

weETH

Its DEX liquidity is concentrated on Maverick, with significantly smaller pools available on SyncSwap.

Maverick

weETH

Usage on Aave

weETH

weETH has become one of the largest assets on Aave; its primary use case is as collateral in leveraged yield farming strategies by borrowing WETH.

USDe

USDe’s utilization has been inconsistent, though in the last month supply has grown significantly.

The asset is primarily used as collateral against USDT and USDC, while the plurality of its borrows are against weETH.

sUSDe

Utilization of sUSDe has also been inconsistent, with a sharp drop in supply in September; just $730K of its $40M debt ceiling is being used.

Borrows are evenly split between USDT and USDC, with DAI in a distant third.

LTV, Liquidation Threshold, and Liquidation Bonus

We recommend aligning weETH’s parameters with those on other deployments.

For USDe and sUSDe, we recommend matching the LT on other deployments (75%) while setting the LTV lower (65%) to reduce the chance of liquidations in the early stages after listing. LTV can be raised after DEX liquidity improves.

Supply and Borrow Caps

Following Chaos Labs’ approach to initial supply caps, we propose setting the Supply Cap at 2x the liquidity available under the Liquidity Bonus price impact. However, this would set the initial supply cap above the current on-chain supply. As such, we recommend setting the cap to 50% of on-chain supply and anticipate that this new market will induce demand for the asset on zkSync. We are prepared to facilitate supply cap increases in this market to ensure that it grows safely. We recommend setting the borrow cap at roughly 50% of the supply cap, as we have observed some demand for borrowing weETH.

For USDe and sUSDe, we align with Llama Risk’s proposed caps, finding that they are low enough to limit risk to the protocol. Additionally, we recommend not allowing sUSDe borrowing, as on Ethereum.

Isolation Mode

We recommend listing USDe and sUSDe in isolation mode, as on Ethereum, with debt ceilings set equivalent to the supply caps, as the primary function of isolation mode in this case is to ensure that volatile assets are not borrowed against USDe and sUSDe.

Interest Rate Curve

We recommend aligning the IR curve with the settings on other deployments.

E-mode

We recommend listing weETH in the ETH-correlated E-Mode category

Pricing

We recommend aligning the pricing strategy for all assets with existing listings.

Recommendations

Following the above analysis, we recommend the following parameters on zkSync.

Parameter	weETH	USDe	sUSDe
Isolation Mode	No	Yes	Yes
Borrowable	Yes	Yes	No
Collateral Enabled	Yes	Yes	Yes
Supply Cap	300	500,000	400,000
Borrow Cap	150	50,000	-
Debt Ceiling	-	$500,000	$400,000
LTV	72.5%	65%	65%
LT	75%	75%	75%
Liquidation Bonus	7.5%	8.5%	8.5%
Liquidation Protocol Fee	10%	10%	10%
Variable Base	0%	0%	-
Variable Slope1	7%	9%	-
Variable Slope2	300%	75%	-
Uoptimal	30%	80%	-
Reserve Factor	45%	25%	20%
Stable Borrowing	Disabled	Disabled	Disabled
Flashloanable	Yes	Yes	Yes
Siloed Borrowing	Disabled	Disabled	Disabled
Borrowable in Isolation	No	No	No
E-Mode Category	ETH-correlated	-	-

[ACI]

The current proposal has been escalated to ARFC Snapshot, after including latest Risk Parameters provided by Risk Service Providers.

Vote will start tomorrow, we encourage everyone to participate.

[ACI]

After Snapshot monitoring, the current ARFC Snapshot has recently ended, reaching both Quorum and YAE as winning option, with 773K votes. Therefore the ARFC has passed.

Next step will be the publication of an AIP for final confirmation.