[ARFC] Prime Instance - Restore ETH LTV

title: [ARFC] Prime Instance - Restore ETH LTV
author: @TokenLogic
created: 2024-02-04


Summary

This publication proposes restoring ETH’s LTV to 82% on the Prime instance of Aave v3.

Motivation

With the introduction of liquidity mining rewards for ETH deposits on Prime, some users exploited wETH/wETH leverage to farm rewards. In response, ETH’s LTV was set to 0, preventing new ETH collateral positions while preserving existing ones.

Transitioning from direct liquidity mining emissions to a periodic Merkl distribution ensures that users leveraging wETH/wETH can be disqualified from rewards. By introducing qualification criteria, incentives are directed toward users who engage with the protocol as intended.

While details of the future liquidity mining program are yet to be announced, this proposal focuses on re-enabling ETH collateral positions by restoring the LTV to 82%—its original level at Prime’s launch.

Specification

The LTV for ETH on Prime is to be amended as outlined below:

Parameter Current Proposed
LTV 0.00% 82.00%

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

  1. Gather feedback from the community.
  2. If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
  3. If Snapshot outcome is YAE, escalate this proposal to the AIP stage.

Copyright

Copyright and related rights waived via CC0.

1 Like

LlamaRisk supports this change. Only ≈19% (169k/900k ETH) of the ETH supply cap is filled on the Prime instance. With LTV set to 0%, borrowing against ETH was disabled outside E-mode. As a result, all borrowing activity has been driven solely by ETH-correlated E-mode (93.5% max LTV and wstETH as collateral).

ETH parameter comparison, Core vs Prime Instance:

Instance Max LTV LT LP uOptimal Slope1 Slope2 Liq. Fee Reserve factor
Prime 0%→82% 83% 5% 90% 2.8% 85% 10% 10%
Core 80.5% 83% 5% 90% 2.7% 80% 10% 15%

ETH’s borrow rates on Prime are higher due to steeper Slope1 and Slope2 parameters, and the new LTV (82%) exceeds Core markets (80.5%). With borrow demand primarily driven by LRT looping, E-modes dominate total borrowing on Prime.


Collateral to Borrow mapping on Aave V3 Prime. Source: LlamaRisk, February 5th, 2025.

Restoring ETH’s LTV to 82% will enable borrowing outside E-mode, with the primary use case foreseen as borrowing stables.

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.

2 Likes

Summary

Chaos Labs supports the proposal to increase WETH’s LTV in the Prime instance.

Analysis

WETH’s LTV in the Prime instance was lowered following significant looping in the market. Later, we proposed a risk parameter update to address WETH-WETH looping in E-Mode. This was a multi-stage process, with the final step being to raise the non-E-Mode LTV for WETH to facilitate stablecoin borrowing. We note that the goals of these proposals have been achieved; none of the top WETH suppliers are looping.

Overall, just $39.5K of WETH is borrowed using WETH, relative to a total supply of $465M, indicating that looping has effectively been eliminated.

As described in this proposal, the change in incentive structure means that WETH/WETH loopers can be disqualified, eliminating any reason to loop the asset.

Finally, WETH’s liquidity remains strong even following significant volatility in recent days, indicating that the previously selected LTV remains appropriate for this asset and instance.

The activation of WETH as collateral in the Prime instance is anticipated to generate substantial deposit demand due to its higher interest rates compared to the Core instance. Currently, supply growth is significantly constrained by the inability to borrow stablecoins against ETH collateral. This limitation is evident in the distribution of borrowed assets against WETH collateral in the Core instance, as shown in the image below, where the majority of the borrowing activity involves stablecoins.

As an additional step, we recommend removing WETH as a collateral asset from E-Mode. Following this, users using WETH as collateral in E-Mode will revert to the non-E-Mode parameters, meaning an LT of 83%. If there is no change in positions, the $38K of WETH being looped in E-Mode (shown above) may be liquidated. These users have had more than three months to adjust their positions.

Specification

Instance Asset Current LTV Rec. LTV
Ethereum Prime WETH 0% 82%

ETH Correlated E-Mode on Ethereum Prime

Parameter Value Value
Asset WETH wstETH
Collateral Yes → No Yes
Borrowable Yes No
LTV 93.50% 93.50%
LT 95.50% 95.50%
Liquidation Penalty 1.00% 1.00%

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this recommendation.

Copyright

Copyright and related rights waived via CC0