Overview
Chaos Labs supports removing USDS from the sUSDe Stablecoins Liquid E-Mode in the Prime instance by setting USDS as non-borrowable. We also support increasing the Liquidation Bonus of sUSDe to 4% within all of the Stablecoin correlated E-Modes.
Removal of USDS from E-Mode
USDS on the Prime instance leverages a D3M module from Maker DAO to provide direct liquidity, serving as a crucial incentive to attract WETH and wstETH users to deposit within the new instance. Attracting stablecoin liquidity outside of the Core instance has proven challenging, making this D3M liquidity essential. However, the inclusion of USDS in the sUSDe Liquid E-Mode has led to a significant portion of the D3M liquidity being used for looping strategies. This dynamic has caused interest rate spikes, negatively affecting borrowers using ETH-correlated collateral.
In order to maintain a stable and efficient market that positively affects users using WETH and wstETH as collateral, we support the removal of USDS from the sUSDe Stablecoin E-Mode on Prime. However, to prevent the liquidation of existing sUSDe/USDS looping positions, which would occur due to sUSDe’s 0.1% LT outside of E-Mode, we recommend keeping USDS listed within the E-Mode but setting it as “non-borrowable.” This approach allows existing positions to remain open while preventing new ones from being opened.
Additionally, through this step, looping sUSDe with USDC will still be possible, hence potentially attracting new USDC liquidity thanks to the higher supply rates.
sUSDe Liquidation Bonus Increase
Regarding the proposed increase of the sUSDe liquidation bonus from 3% to 4%, we support the adjustment in the Core and Prime instances. Given the significant growth in the supply of sUSDe in the last months, its relatively stagnant DEX liquidity, and the growth in Aave’s exposure to the asset, we find increasing the Liquidation Bonus of sUSDe to be a prudent decision. As the topic of the Liquidation Bonus for sUSDe was previously discussed in this post, the current parameters were sufficient at the time.
While the recommended change does not address the likelihood of liquidations caused in the sUSDe market, given the significant increase in the ratio between sUSDe supply and sUSDe/USDe DEX liquidity, we expected an increased discrepancy between sUSDe market price and exchange rate at the time of liquidation. This change addresses that concern, providing an additional buffer to support the liquidator’s profitability during deviation events.
Specifications
Chaos Labs recommends the following parameters for the assets and changes covered in this analysis.
| Parameter | Asset | Instance | E-Mode | Current Value | Recommended Value |
|---|---|---|---|---|---|
| Borrowable | USDS | Prime | sUSDe Stablecoins | Yes | No |
| Liquidation Bonus | sUSDe | Prime | sUSDe Stablecoins | 3.00% | 4.00% |
| Liquidation Bonus | sUSDe | Core | sUSDe Stablecoins | 3.00% | 4.00% |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
Copyright and related rights waived via CC0