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
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