[ARFC] Onboard weETH to Aave v3 on Ethereum

[ChaosLabs]

@ChaosLabs

Supply Cap, Borrow Cap, and Liquidation Bonus

While Chaos Labs’ approach to initial supply caps is generally proposed through setting the Supply Cap at 2x the liquidity available under the Liquidation Penalty price impact, given the minimal weETH historical data, we initially recommend a 1x value. Although on-chain liquidity could allow for higher caps, our preference is to set the caps conservatively to observe user behavior and demand before optimizing the caps. Should demand scale, we will reassess and parameterize accordingly.

Given the current DEX liquidity profile of weETH, we recommend a 7.5% Liquidation Bonus and a supply cap of 8000 weETH.

Based on our observations, the utilization rate for LSTs has been low due to obvious additional borrowing costs. Therefore, we have taken a conservative approach toward LST/LRTs borrow caps of 800 weETH. However, if there is a significant increase in demand and utilization, perhaps due to external incentives, we will reassess the caps according to the utilization pattern.

By “liquidity available under the Liquidation Penalty price impact”, we mean the maximum amount that can be sold atomically on-chain, such that the slippage on that trade is less than the liquidation penalty, in this case 7.5%. Most of the on-chain liquidity for weETH is on two balancer pools:

• Balancer
• Balancer

Assuming that liquidity doesn’t change significantly, it should suffice to liquidate the entire amount of 8000 weETH:

Based on this liquidity data collected over the limited history of the token - we set the supply cap to 8000 weETH, providing high confidence that any weETH collateral could be liquidated if necessary. The borrow cap is derived from the supply cap - no more than 10% of the supply cap can be borrowed in the lack of a clear use case to borrow this token.