This proposal seeks to update parameters on ETH-correlated assets and coordinate caps management to improve Aave efficiency.
Motivation
ETH and ETH-correlated assets are the largest reserves in the Aave protocol, leading to their usage as collateral and being one of the protocol’s largest revenue drivers.
ETH is mainly used for two use cases:
Collateral to borrow stablecoins
Borrowed using ETH-correlated assets to leverage loop a staking/restaking yield.
This second use case is very sensible to the borrowing cost of wETH and, if kept unchecked, can lead to a negative yield experience for some long-term users having significant leverage positions.
To mitigate this, we propose to optimize the ETH-correlated assets parameters on all markets, and we seek governance greenlight on a cap management policy by risk stewards.
Specification
WETH:
Slope 1 is optimized to 2.7% on all Aave instances, ensuring LST/wETH loops profitability
Caps & rate management policy:
Maintain a minimum 25 bps discount between stETH 30-day avg APR and Slope 1 wETH borrow cost with monthly AIPs to enforce this policy
Support research and development to create new InterestRateStrategy contracts for wETH implementing this policy algorithmically.
Keep wETH borrow cap increases ceiling at 90% of currently supplied wETH on all networks
Disclaimer:
The Aave Chan Initiative did not receive compensation for creating this proposal.
Next Steps
If consensus is reached on this [ARFC], escalate this proposal to the Snapshot stage.
If the Snapshot outcome is YAE, this proposal will be escalated to the AIP stage, and the cap management new policy will be considered canon.
Hey. Good timing with this proposal, as I was just about to make a new post about this topic as well.The recent weETH snapshot vote suggested raising weETH caps to 1 Mil weETH. It’s currently at 450k weETH (ETH mainnet+ Arbitrum), but if @ChaosLabs increase the caps one more time, that would very likely push the ETH utilization above u-opt/kink and lead to chaos and essentially force out every ETH borrower other than current weETH airdrop farmers. I think this would be unfair to them, as they have been the main revenue generators for Aave for years now. Limiting the ETH borrow caps to 90% of the supplied ETH would mitigate this issue to a large extent (still susceptible to larger ETH withdrawals) and make sure those users aren’t punished. At the same time this would allow Aave to keep growing with users depositing weETH as collateral to borrow stablecoins and other tokens without punishing other long term ETH borrowers. Keeping the long term ETH borrowers on Aave instead of losing them to competitors would also be a healthy precaution against a sudden DAO revenue drop-off in case there would be a larger exit of weETH users after the end of the airdrops.
One question I have regarding the enforcement of the cap management: On other networks, for example Arbitrum, managing this shouldn’t be too hard as the caps are set very tightly and borrow caps are set to be at 90% ratios of the supplied assets currently already more or less. But on the Aave Ethereum mainnet market, the borrow caps are currently set far higher than 90% of the supplied ETH. Currently 778k ETH are supplied here while the borrow cap is set to 1.4 Mil ETH, so almost 200% ceiling compared to the current supply. Would risk stewards like ChaosLabs be able to “decrease” this amount on Aave Ethereum and set a lower borrow cap ceiling here in this case?
If that’s possible, I think this proposal is a very good solution overall.
Sorry for delay in my answer it was in draft for some reason
Hello @PDRML you’re pinpoint accurate in your analysis.
Unfortunately, that’s not an option for the current CapsPlusStewards (risk steward). That’s why several service providers are coordinating to update this old steward with more capabilities and will present a governance proposal shortly to request governance approval.
Hi. I wanted to ask if there has been any progress/update regarding an improved/updated Risk Steward, with the capability for @ChaosLabs to decrease cap ceilings? Are the service providers still working on a proposal for that?
The ETH utilization on AaveV3 Ethereum is now sitting at close to 87% already.
Thanks!