[ARFC] Optimism Create ETH E-Mode

title: [ARFC] Optimism Create ETH E-Mode
shortDescription: Create an ETH nomiated E-Mode on Aave Optimism v3.
author: @Llamaxyz - @TokenLogic
created: 2023-05-20


This publication proposes creating an ETH nominated E-Mode on the Aave Optimism v3 deployment.


Creation of an E-Mode on Aave Optimism v3 will grant users the ability to enter yield maximising strategies with greater capital efficient.

With the introduction of an ETH E-Mode, Aave Protocol is expected to experience greater borrowing demand for wETH, leading to enhanced revenue generation.


Upon reviewing how several of the largest wallets holding aoptwstETH are interacting with Aave Protocol, there is a clear demand for yield generation by borrowing wETH and acquiring more wstETH to loop.

The below shows how the largest variableDebtOptwETH holder is interacting with Aave Protocol. Deposit wstETH and borrow wETH. This users generates 23.90% of the wETH debt, 23.90% of the wETH revenue for Aave DAO on Optimism.

Screenshot 2023-05-20 at 13.28.19

Creating an ETH E-Mode, will enable this user to borrow more wETH and also entice other users to enter into similar strategies.

Screenshot 2023-05-20 at 13.24.57

Checking on-chain liquidity, a 4,950 wstETH to wETH swap incurs 0.91%, this will enable the strategies to deleverage whilst giving back minimal yield. The wETH to wstETH swaps, increasing leverage, incur more price impact than deleveraging swaps. This will increase the pay back period of the strategy which is beyond Aave’s control.

Screenshot 2023-05-20 at 13.25.16

It is worth noting that the near 1% price impact swap lot size is considerably larger than existing users of Aave Optimism v3. However, this is more applicable to structured products which pool deposit capital leading to larger swap sizes.


There are several Chainlink oracle available:

The wstETH oracle on Optimism draws upon the price of stETH across several networks. This means the oracle is subject to what wstETH is trading at on other networks. This acts to de-risk the Optimism E-Mode as the wstETH price is not as exposed to the wstETH/ETH price on Optimism as it otherwise could have been.

Creation of the E-Mode will enable the wstETH price on Optimism to be arbitraged against the wsETH oracle price which is expected to lead to a tighter price correlation with wstETH true value. Such strategies are potential yield sources for more sophisticated users.

Something to consider is the stETH & wstETH yield is updated every 24 hours. This affects the exchange rate wstETH/stETH. The stETH oracle is also spot market based and not calculated. This created caution when the original proposal to add wstETH as collateral with ETH E-Mode was proposed.

Since the original Add wstETH to Aave Optimism v3 proposal, the wstETH/USD and wstETH/ETH oracles have been published. The later is most applicable to the ETH E-Mode category. There is sufficient permutations of oracles to facilitate using either BGD and/or Gauntlet + Chainlink price synchronised adapters. The most optimal oracle solution will be used at time of deployment with input from risk providers and @bgdlabs.


The following risk parameters have been proposed by Llama.

Ticker: wstETH

Contract: optimism:0x1F32b1c2345538c0c6f582fCB022739c4A194Ebb

Ticker: wETH

Contract: optimism:0x4200000000000000000000000000000000000006

Parameter Value
Category 1 (ETH Correlated)
Assets wstETH, wETH
Loan to Value 90.00%
Liquidation Threshold 93.00%
Liquidation Bonus 1.00%


Copyright and related rights waived via CC0.


I don’t really think it’s a good idea, their price is usually not correlated, I would wait to have more history with the withdrawals that are already available or that they are enabled in L2.

As we recommended on a separate LST discussion and following our Chaos Labs LSD Methodology Update, we support this proposal to create an ETH-correlated E-Mode on Optimism


Hi Everyone,

A Snapshot proposal has been created to progress this proposal through the Aave Governance process.


Thanks @Llamaxyz - for context, we commented previously in the forums on ETH correlated E-mode for Optimism here. Gauntlet supports adding an ETH Correlated E-Mode on Optimism. Once BGD’s AIP to update the price sync adapter for wstETH on Optimism has been executed, and the community has decided on a path forward for the “killswitch” functionality for wstETH pricing, Gauntlet will provide risk parameter recommendations for this ETH-correlated E-mode.

Are the LTV and LT flipped? Isn’t LT is usually higher than LTV? If one takes out a loan at the LTV of 93%, it would be already above the liquidation threshold.

Hi @Michigan_Blockchain,

This is current and thank you for highlighting this typo. We have amended the post above to reflect this.
Thanks again.

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