[ARFC] Optimism v3 Supply Cap Update 20.05.2023

[Llamaxyz]

---

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.

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.

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.

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.

[ChaosLabs]

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.

[Gauntlet]

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.

[Llamaxyz]

Hi Everyone

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

[MarcZeller]

Hello,

With the Aave V3 Caps Update Framework, and since the AIP-234 vote, the Risk Council via the Risk Steward can enforce this kind of proposal.

This proposal has full support from ACI, and there’s community consensus on it.

to limit governance bloating via the excessive amount of low governance-value AIPs votes,

we request the risk steward to enforce these changes and request @Llamaxyz to consider removing this snapshot vote and project to publish an AIP.

[Llamaxyz]

Hi @MarcZeller,

Yes - it is possible for the Risk Stewards to implement an 18,000 units wstETH Supply Cap on Arbitrum now. We are coordinating with Risk Service providers to implement this change.

We also note, as there is a difference between 18,000 units and 21,000 units when have followed the governance process to create a Snapshot. Pending the result of the Snapshot, if need be, either the Risk Stewards or AIP can revise the Supply Cap. We are currently about to vote on how to proceed.

[MarcZeller]

This is governance bloating and unnecessary,

in case of different recommendations by risk service providers, Aave DAO usage is to go with the most conservative option (in this case, Gauntlet).

If the supply cap is reached, the risk steward can modify caps every 5 days. So even this scenario is more efficient for the Aave DAO.

Therefore this proposal should be enforced with the following parameters, and a snapshot vote is unnecessary.

@Llamaxyz

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

[Llamaxyz]

Hi @MarcZeller,

Yes - Risk Stewards can implement the 18,000 units now.

The process, if we want to increase the cap beyond 18,000 units, then a Snapshot is required.

After the Snapshot is complete and the community has expressed a directional commit, we can then asses if the Risk Stewards will implement the change.

Hopefully we can avoid the need to submit an AIP. The Snapshot will finish in around 4 days time.