[ARFC] Optimism v3 Supply Cap Update 20.05.2023


title: [ARFC] Optimism v3 Supply Cap Update
shortDescription: Increase the Supply Cap for wstETH on Aave Optimism v3
author: @Llamaxyz - @TokenLogic
created: 2023-05-20


Summary

This publication proposes increasing the wstETH Supply Cap on Aave Optimism v3.

Abstract

The current utilisation of wstETH 91.75%. This publication proposes increasing the Supply Caps to enable greater deposits into Aave Optimism v3.

Motivation

As supply of wstETH on Optimism and deposits in Aave v3 continue to grow, the Supply Cap requires continual updates to reflect market conditions.

Current utilisation is 91.75%, with a cap of 12,000 units and a wstETH supply of 35,574.52 units on Optimsim.

Screenshot 2023-05-20 at 11.54.07

Predominately, most large wstETH collateral holdings are being used to borrow wETH. However, there are a few large addresses borrowing stable coins. Using Chaos Lab’s Risk Explorer, assuming the price of wstETH drops by 20%, there is $0 bad debt incurred to Aave Protocol.

Screenshot 2023-05-20 at 11.54.40

The largest wstETH collateral and stable coin debt users have resonably conservative health factor ratings. Some are also using multiple assets as collateral and are passively holdings funds that could be deposited into Aave Protocol as collateral.

Screenshot 2023-05-20 at 11.54.58

If such positions were liquidated the wstETH>>wETH>>USDC routing is most effective assuming liquidators are reverting back to an initial stable coin holding.

There are 5 wallets holding more than 510 aoptwstETH. However, when viewed in agggregate the larger wallets with stable coin debt have helath factors around 1.45-1.50. Current liquidity exceeds that required to liquidate the largest positions.

Due to the favourable liquidity coniditions, how users are interacting with Aave Protocol, this publication seeks to increase the Supply Cap by 75%. This represents 59.03% of wstETH supply on Optimism.

When LST Supply Caps have been raised on other networks, they have been filled quickly. This highlights the need for larger Supply Cap increases to reduce governance overhead, but also to support communities building on Aave. When Supply Caps are reached, products built on top of Aave are adversley affected.

With reference to the new ARFC Aave V3 Caps update Framework it is possible to ship several upgrades to gradually increasing Aave’s exposure to wMATIC over time.

Specification

The following risk parameters have been proposed by Llama.

Ticker: wstETH

Contract: optimism:0x1F32b1c2345538c0c6f582fCB022739c4A194Ebb

Parameter Current Value Proposed Value
SupplyCap 12,000 units 21,000 units

Copyright

Copyright and related rights waived via CC0.

2 Likes

Per our supply cap methodology, we support the increase suggested in this post.
We conducted stress tests simulating severe wstETH price drops, with results yielding minimal potential losses for the protocol.
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1 Like

Gauntlet believes this cap increase to 21000 for wstETH on Optimism is premature and instead recommends a cap increase to 18000. Our methodology, as tailored to how LSTs are currently priced, thresholds the supply cap to 50% of the local supply which in this case is 18000. wstETH pricing must move to the synchronized price adapter solution, and the community align on potential “killswitches” in the event of wstETH depeg, for any further cap increases to not add excess market risk.

Hi Everyone :wave:

This proposal has been escalated to Snapshot with the following options for the community to consider:

YAE - Chaos Labs (21,000 units)

Parameter Current Value Proposed Value
SupplyCap 12,000 units 21,000 units

YAE - Gauntlet (18,000 units)

Parameter Current Value Proposed Value
SupplyCap 12,000 units 18,000 units

NAE
ABSTAIN

Snapshot:
https://snapshot.org/#/aave.eth/proposal/0x25045871e22346303d2c2c89a4185a58859b3567e2b7dc0234dd2dd920d7c1f7