# \[ARFC\] Prime & Core Instance - wstETH Reserve Update **URL:** \ **Category:** Governance\ **Created:** [November 28, 2024, 9:47pm UTC](https://governance.aave.com/t/arfc-prime-core-instance-wsteth-reserve-update/19973 "2024-11-28T21:47:30Z")\ **Posts on this page:** 1\ **Showing post:** 2
**Author:** ![LlamaRisk](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/llamarisk/32/12865_2.png) [@LlamaRisk](https://governance.aave.com/u/LlamaRisk)\ **Post date:** [December 3, 2024, 3:07pm UTC](https://governance.aave.com/t/arfc-prime-core-instance-wsteth-reserve-update/19973/2 "2024-12-03T15:07:32Z")
## Summary LlamaRisk supports the proposal. The end of Renzo’s Season 2 rewards program is expected to greatly reduce the profitability of the ezETH/wstETH leveraged-looping strategy, which is currently the main driver behind ezETH’s growth on Aave. For instance, the [ezETH Yield Layer product](https://yieldlayer.cian.app/vaults/0x3D086B688D7c0362BE4f9600d626f622792c4a20?chainId=1) of [CianProtocol](https://cian.app/) currently offers 31.41% APY. Once that yield is reduced to more reasonable levels, users can benefit from the high yields offered by the _sUSDe Stablecoins_ liquid E-mode. The proposed increase in _uOptimal_ will help compensate for this effect and retain the ezETH supply. ![image](https://europe1.discourse-cdn.com/flex013/uploads/aave/original/2X/7/7864d3947f458d4100ae65c99276f1584fc3dc69.png) Source: [CianProtocol ezETH Yield Layer](https://yieldlayer.cian.app/vaults/0x3D086B688D7c0362BE4f9600d626f622792c4a20?chainId=1), December 2nd, 2024 While a higher _uOptimal_ increases the capital efficiency of wstETH, generating more revenue for the Aave DAO, it also increases the severity of a potential bad debt scenario with wstETH as debt. However, the primary use case for wstETH on both the Core and Prime instances are LRT/wstETH leveraged-looping scenarios. Since LRTs are correlated to wstETH, the liquidation risk is reduced significantly. For this reason, we believe this change would not materialize into a higher risk for the Aave DAO. If the main use case for wstETH borrowing were to change, then such a high-uOptimal would have to be reassessed. | | wstETH Core instance | wstETH Prime instance | | --- | --- | --- | | ETH Correlated Collateral | 98.54% | 100% | #### wstETH Core instance For wstETH on the Core instance, we analyze a scenario where the utilization remains the same after implementing the proposed changes (max utilization sensitivity) and another where the borrowing rate remains the same (max borrow rate sensitivity). We found that the borrowing rate could decrease to a minimum of 0.29%, and the utilization could increase to 26.97%. | | Utilization Rate | Borrow Rate | | --- | --- | --- | | Current | 13.13% | 0.59% | | Max utilization sensitivity | (=) 13.13% | (-) 0.29% | | Max borrow rate sensitivity | (+) 26.97% | (=) 0.59% | #### wstETH Prime instance Again, for wstETH on the Prime instance, analyze a scenario where the utilization remains the same after implementing the proposed changes (max utilization sensitivity) and another where the borrow rate remains the same (max borrow rate sensitivity). We found that the borrowing rate could decrease to a minimum of 1.25% and that the utilization could increase to a maximum of 90%, corresponding to the proposed new _uOptimal_. | | Utilization Rate | Borrow Rate | | --- | --- | --- | | Current | 64.26% | 1.82% | | Max utilization sensitivity | (=) 64.26% | (-) 1.25% | | Max borrow rate sensitivity | (+) 90% | (=) 1.82% | > **Details on methodology** > > We model the _Slope1_ component of the Interest Rate Model (IRM) as an affine function _y = ax + b_, where: > > - _y_ represents the borrowing rate > - _a_ represents the _Slope1_ rate > - _x_ represents the utilization rate > - _b_ represents the base borrow rate > > Given points _A = (0; b)_ and _B = (uOptimal; Slope1 rate)_, we calculate _a_ using _a = (y\_B - y\_A)/(x\_B - x\_A)_. We can then analyze two extreme scenarios: solving for utilization rate _x_ using current borrowing rate _y_ (maximum borrowing sensitivity) and solving for borrowing rate _y_ using current utilization rate _x_ (maximum utilization sensitivity). > > These projections assume rational market behavior under perfect conditions, with all other variables remaining constant. The model is valid only when utilization remains below _uOptimal_, above which the _Slope2_ component requires separate modeling. ### Disclaimer This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work. The information provided should not be construed as legal, financial, tax, or professional advice. --- _[View the full topic](https://governance.aave.com/t/arfc-prime-core-instance-wsteth-reserve-update/19973)._