[ARFC] Prime Instance - wstETH Borrow Rate + rsETH Supply Cap Update

[TokenLogic]

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title: [ARFC] Prime Instance - wstETH Borrow Rate + rsETH Supply Cap Update
author: @TokenLogic
created: 2024-01-14

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Summary

This publication proposes reducing the wstETH Slope1 and increasing the rsETH Supply Cap.

Motivation

The Prime instance of Aave v3 on Ethereum has experienced significant growth since its launch in Q3 2024, attracting over $2 billion in user deposits.

To support continued growth, this proposal suggests lowering the wstETH Slope1 parameter to align the borrow rate with market conditions. Based on feedback from the Renzo and Kelp teams, this adjustment is expected to drive an additional $300 million in user deposits to the Prime instance.

Expected Benefits of Reducing the Slope1 Parameter:

• ~72% increase in LRT deposits.
• ~50% increase in the wstETH Deposit Rate to 60 bps.
• ~50% increase in wstETH Borrow Rate fee generation.
• ~35% increase in the native wETH Deposit Rate.

Lowering the Slope1 parameter will encourage new LRT deposits, boosting the LRT/LST yield-generating strategy, which is projected to outperform the LST/wETH strategy. With LRT deposit incentives, this strategy further enhances Prime’s appeal.

As utilisation of wETH reserves across Core, Spark, and Prime approaches Uoptimal, the Prime instance of Aave v3 offers the highest native yield for LST/wETH yield strategies. The improved wstETH deposit rate solidifies Prime’s competitive position in the market.

rsETH Supply Cap

rsETH has shown strong growth on the Core instance of Aave v3, while the Prime market has yet to attract rsETH deposits due to the lower wstETH Borrow Rate on Core and a small supply cap.

Lowering the wstETH Borrow Rate on Prime would make borrowing wstETH more attractive. Feedback from the Kelp team suggests strong demand for rsETH beyond the current supply cap’s capacity.

To support leveraged LRT/LST yield strategies, this proposal recommends a significant increase to the rsETH supply cap, enabling larger deposits to scale effectively, optimize returns, and reduce reliance on incentives.

Specification

The following parameters on the Prime instance are to be adjusted.

wstETH Reserve

Parameter	Current Value	Proposed Value
Uoptimal	90.00%	90.00%
Base	0.00%	0.00%
Slope1	1.75%	0.75%
Slope2	85.00%	85.00%

rsETH Supply Cap

Parameter	Current Value	Proposed Value
Supply Cap	10,000	65,000

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.

[LlamaRisk]

Summary

LlamaRisk supports the modification of wstETH’s Slope1 on the Prime instance and the increased supply cap for rsETH. We thank @TokenLogic for their work and carefully detailed rationale.

wstETH’s Slope1 Reduction

This change should make LRT deposits more attractive on the Prime instance, relieving the rsETH supply cap on the Core instance. A significant amount of liquidity (up to $300M of rsETH) could be migrated or deposited into Prime. We do not see additional risk introduced with this change.

rsETH supply cap increase

rsETH Prime Market is seeing virtually no usage (with 5 rsETH deposited) with rsETH core market having almost 400K rsETH deposited.

Source: rsETH supply across instances, Aave, January 16 2025

Current usage of this asset on Core is almost entirely in the ETH-correlated Emode, taking advantage of the leveraged staking trade. We perceive this asset to be oversupplied on Core because of a lower cost of borrowing (wstETH borrow is 0.85% on Prime but 0.68% on Core). This means users are unevenly supplying rsETH, taking advantage of the ETH-correlated emode. Some rsETH is likely to migrate to Prime under these new parameters.

Source: rsETH Borrow Distribution, Chaos Labs Community Analytics, January 15th 2025

rsETH is priced using its CAPO rsETH/ETH internal exchange rate and ETH/USD market feed. This pricing mechanism reduces reliance on secondary market liquidity, as wstETH is the primary debt asset and collateral for rsETH, maintaining price correlation. Currently, rsETH contains 6,910 wstETH and 1,999 ETHx. If wstETH depegs, the price ratio is preserved since wstETH is both the main debt asset and rsETH collateral. In the unlikely event of an ETHx severe depeg (for example, due to slashing), rsETH would lose 14.8% of its value, dropping to $2,934, which could trigger $597M in liquidations. This represents a tail-end risk.

Source: rsETH Liquidation Simulator, Chaos Labs, January 16th 2025

It is worth noting that rsETH is redeemable for underlying collateral (ETHx, ETH, or stETH) after a 7-10 day withdrawal period, creating short-term dependency on DEX liquidity should liquidation be required. Current DEX liquidity for rsETH is limited, with Cowswap reporting less than 4K rsETH available for swapping at approximately 7.5% slippage. This low liquidity may prevent liquidators from profitably selling collateral, presenting a collateralization risk. The current DEX liquidity represents less than 1% of the existing supply cap on Core, and the proposed Prime supply cap would further increase exposure to the asset. This represents significant exposure relative to the limited DEX liquidity.

(CoW Swap | The smartest way to trade cryptocurrencies), January 15 2025*

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.

[TokenLogic]

A Snapshot vote has been created for this proposal.

Link to vote: here

Start: Jan 20, 2025 · 2:36 PM
End: Jan 23, 2025 · 2:36 PM

Thank you in advance to everyone that participates in the vote.