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.