Overview
Chaos Labs supports listing weETH on Aave V3 Base as part of the community strategy to increase the offering of Aave protocol with more LST/LRT assets. Following is our analysis and risk parameter recommendations for the initial listing.
Note: The following analysis is conducted solely from a market risk viewpoint, excluding centralization and third-party risk considerations. If the community aims to reduce exposure to weETH, adopting more conservative supply and borrow caps should be considered.
Liquidity and Market Cap
Recently listed on Aave V3 Ethereum, weETH’s TVL in ETH terms has continued to climb, while it has stagnated at around $4B in USD terms because of price changes. Over the last 180 days, weETH’s average market cap is $1.02B and its daily trading volume is $26.24M.
weETH / ETH Volatility
Liquidation Threshold
Considering the volatility and the correlation of weETH to ETH, we recommend setting the LT to 75%. This mirrors the other LSTs on Ethereum V3, albeit with a slight adjustment to account for lower liquidity and the asset’s relative novelty.
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 minimal weETH historical data, we initially recommend a 1x value, also noting that on-chain supply is still relatively low at 838 weETH. Given the current DEX liquidity and on-chain supply of weETH, we recommend a 7.5% Liquidation Bonus and a supply cap of 150 weETH.
Based on our observations, the utilization rate for LST/LRTs has been low due to additional borrowing costs, though weETH’s is slightly higher than similar assets because of external incentives. Therefore, we have taken a slightly less conservative approach towards its borrow cap, recommending it be set to 30 weETH.
IR Curve Parameters
We recommend aligning the interest rate parameters with those of similar assets to ensure consistency on Aave v3.
E-mode
Given the asset’s overall liquidity and risk profile, we support including weETH in the ETH-correlated E-mode category. The EtherFi protocol currently has a 122K ETH withdrawal buffer in its native liquidity pool, and weETH can always be redeemed for the underlying ETH depending on the involvement of the user within the protocol.
Recommendations
Following the above analysis, we recommend listing weETH with the following parameter settings:
| Parameter | Value |
|---|---|
| Isolation Mode | No |
| Borrowable | Yes |
| Collateral Enabled | Yes |
| Supply Cap (weETH) | 150 |
| Borrow Cap (weETH) | 30 |
| Debt Ceiling | - |
| LTV | 72.50% |
| LT | 75.00% |
| Liquidation Bonus | 7.50% |
| 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 |
| Borrowed in Isolation | No |
| E-Mode Category | ETH-correlated |
CAPO recommendations:
Given weETH employs buffered withdrawals for its underlying ETH equivalent exchange rate, the weETH/ETH exchange rate/USD will be utilized as the oracle alongside the correlated asset price oracle. We present our recommendations below.
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 8.75% | monthly | 7 days |
