[ARFC] Onboard USDC to Aave v3 Lido Instance

Governance
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Title: [ARFC] Onboard USDC to Aave v3 Lido Instance

Author: ACI

Date: 2024-09-25

Summary

This proposal aims to onboard USDC to the Aave v3 Lido Instance.

Motivation

The integration of USDC into the Aave v3 Lido Instance is driven by the following factors:

  1. Liquidity Enhancement: The inclusion of this widely-used stablecoin is expected to boost liquidity in the Lido Instance, potentially attracting more users and increasing overall platform activity.
  2. Strategic Alignment: This move aligns with Aave’s goal of offering a comprehensive suite of high-quality assets, keeping the protocol at the forefront of DeFi liquidity.

Proof of Liquidity and Deposit Commitments

USDC has pledged liquidity provision support. These will complement the ongoing incentives for the Lido Instance.

Specification

Contract addresses:

USDC: 0xA0b86991c6218b36c1d19D4a2e9Eb0cE3606eB48

Parameter USDC
Chain-Instance Ethereum-Lido
Isolation Mode No
Borrowable Yes
Collateral Enabled No
Supply Cap 30,000,000
Borrow Cap 27,600,000
Debt Ceiling -
LTV -
LT -
Liquidation Bonus -
Liquidation Protocol Fee -
Variable Base 0%
Variable Slope1 5.5%
Variable Slope2 60%
Uoptimal 92%
Reserve Factor 10%
Stable Borrowing Disabled
Flashloanable Yes
Siloed Borrowing Disabled
Borrowable in Isolation Yes
E-Mode Category -

Disclaimer:

This proposal is powered by Skywards. ACI is not directly affiliated with USDC and did not receive compensation for creation of this proposal.

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

1 Like
2

Overview

Chaos Labs supports listing USDC and FRAX on Aave V3’s Lido Instance. Below are our analyses and initial risk parameter recommendations.

LTV, Liquidation Threshold, and Liquidation Bonus

We recommend disabling these assets as collateral given their limited use cases in this instance. Additionally, if incentives are enabled, these assets could be used to loop with themselves, increasing costs for organic borrows.

Supply and Borrow Caps

Following Chaos Labs’ approach to initial supply caps, we generally propose setting the Supply Cap at 2x the liquidity available under the Liquidity Bonus price impact.

However, in this situation, we prefer to set the caps more conservatively to first assess demand for supplying and borrowing these assets, given that the original purpose of this instance was to facilitate wstETH-WETH leveraged yield farming. Additionally, while $327M USDC was borrowed against wstETH on the main Ethereum instance, observations from the uptake of the Lido instance indicate that migration will be an extended process, allowing us to facilitate cap increases.

image - 2024-10-02T000256.202

The amount of wstETH supplied in the Lido instance is currently 1/10 of that in the main instance, indicating that we are unlikely to see more than 32M in USDC borrow demand at current wstETH supply levels.

$179K of FRAX is being borrowed against wstETH in Ethereum-Main, though there may be more demand in this instance because USDT — the second most borrowed stablecoin against wstETH — is not listed.

Thus, we recommend setting their respective supply caps at 2x the liquidity available below 1% price slippage for a swap to wstETH, with borrow caps set according to UOptimal.

Interest Rate Curve

We recommend aligning the IR curves with the settings on Ethereum-Main.

Recommendations

Following the above analysis, we recommend the following parameters for USDC and FRAX in the Lido instance.

Parameter USDC FRAX
Chain-Instance Ethereum-Lido Ethereum-Lido
Isolation Mode No No
Borrowable Yes Yes
Collateral Enabled No No
Supply Cap 30,000,000 20,000,000
Borrow Cap 27,600,000 18,000,000
Debt Ceiling - -
LTV - -
LT - -
Liquidation Bonus - -
Liquidation Protocol Fee - -
Variable Base 0% 0%
Variable Slope1 5.5% 5.5%
Variable Slope2 60% 75%
Uoptimal 92% 90%
Reserve Factor 10% 20%
Stable Borrowing Disabled Disabled
Flashloanable Yes Yes
Siloed Borrowing Disabled Disabled
Borrowable in Isolation No No
E-Mode Category - -
2 Likes
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After discussion with service providers, this proposal will segregate USDC & FRAX onboarding.

USDC will be escalated to AIP first alone.

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After the requisite forum discussion period, this proposal has been escalated to Snapshot stage for voting, being USDC first. We encourage everyone to participate.

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Summary

LlamaRisk recommends onboarding USDC and FRAX stablecoins as non-collateral assets only on the Lido instance, which aligns with Chaos Labs’ proposed parameters, as we discussed together and agreed upon. Because of the high demand for wstETH<>USDC borrowing — currently maxed out on the main instance — we expect a significant inflow of both wstETH and USDC on the Lido instance. However, the demand for wstETH<>FRAX borrowing is expected to be small, which is why a smaller supply cap of $20m is recommended — similarly to other instances allowing FRAX borrowing, even though the available liquidity for the pair is plentiful.

Although the segregated nature of the LiDo V3 market allows for riskier parameters, the close-to-maxed-out wstETH<>USDC usage on the main instance should be enough to incentivize the migration of this use case to the Lido instance for now.

Detailed remarks below

Potential demand for wstETH<>stablecoin borrowing

USDC borrowing on the main Aave V3 instance is nearly uOptimal (90%). Considering that $334m USDC is currently being borrowed against wstETH on the main Aave V3 instance, we believe that the onboarding of USDC as a borrowable asset on the Lido instance will drive wstETH<>USDC borrowing out of the main instance into the Lido instance until an equilibrium is reached. Therefore, no incentives for USDC deposits will be needed on the LiDo instance.

Regarding FRAX, there is currently $181k FRAX being borrowed against wstETH on the main Aave V3 instance, which is relatively small compared to the $15m supply cap. Therefore, the proposed incentive for FRAX borrowing will be welcome to bootstrap this market further.

Supply and Borrow caps

Although we expect significant demand for wstETH<>USDC borrowing on the Lido instance, a conservative supply cap is warranted. The wstETH<>USDC liquidity on secondary markets must be sufficient to liquidate both positions on the main and Lido instances. Ultimately, we believe migrating the wstETH<>USDC usage towards the Lido instance is desirable. If the Lido instance receives enough wstETH<>USDC borrowing interest, a decrease of the wstETH<>USDC caps on the main instance and an increase on the Lido instance will be useful to accompany the migration of funds.

For FRAX, only $181k FRAX is being borrowed against wstETH on the main Aave V3 instance even though the available liquidity when bought using wstETH sits at a level close to that of a wstETH<>FRAX swap at $150m. Because of the low anticipated demand, a much smaller supply cap of $20m makes sense. Similar supply caps for FRAX borrowing are currently used on the main and EtherFi instances of Aave V3. This gives room for growth and potential subsequent increases of the FRAX supply cap through time.

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.

2 Likes
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Why not enable collateral? whats the downside of doing so? I am looking to bring over a wsteth/eth position but my collateral is usdc.

edit: just saw USDS is collateral…seems inconsistent

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USDS collateral ??
“Asset cannot be used as collateral.” That’s what I’m reading right now

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ah, my mistake. i see that in the UI. I looked at the governance action for onboarding USDS and it says collateral enabled, but I overlooked the footnote about the lido-instance-specific actions.
anyhow, question still stands, especially for the USDC case. why not have it as collateral?

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