Summary
Chaos Labs supports the proposal to increase rsETH’s LT and LTV in Aave V3 Core and Prime Instance’s E-Mode.
Motivation
rsETH is currently configured with an LTV of 92.5% and an LT of 94.5% in the E-Mode for both the Ethereum Core and Prime Instances.
As a Liquid Restaking asset, rsETH carries a more more significant set of underlying risks compared to LSTs, such as its additional duration risk derived by the longer withdraw time from Eigenlayer staking, the combination of the counterparty and slashing risk of all the backing assets, which in rsETH’s case are wstETH and ETHx, and slashing events from AVS validation.
However, based on our assessment of its volatility, liquidity, and supply distribution, we believe an increase in its LTV and LT within E-Mode is justified, enabling users to enhance their capital efficiency.
Volatility
Over the past three months, the deviation between rsETH’s market rate and its internal exchange rate has suffered fluctuations. As shown in the chart, the largest observed deviation has been 102 bps, which, while fairly significant is sufficent to support the proposed change. Additionally, when deviations occurred, rsETH demonstrated a strong ability to mean-revert quickly back to its internal exchange rate.
Liquidity
The liquidity of rsETH has seen a slight decline over the past three months but has generally remained stable. Currently, selling 2K rsETH for USDC incurs less than 3% price slippage.
Supply Distribution
The supply of rsETH on Ethereum Core Instance is well distributed. Among the top 10 suppliers, all except two are borrowing wstETH or WETH, both of which are highly correlated with rsETH. Of the remaining two positions, one has no borrowing activity, while the other maintains a high health score above 9.
The largest borrowed asset against rsETH is wstETH, accounting for 98.42% of the total distribution, significantly reducing the likelihood of large-scale liquidations.
The supply distribution of rsETH on the Ethereum Prime Instance appears highly concentrated in a single position. However, this position belongs to a CIAN rsETH/ETHx leverage vault, which employs a looping strategy using wstETH as the borrowed asset. Since CIAN vaults are managed as a single position but represented by multiple suppliers, the apparent concentration is a structural characteristic rather than an actual risk. Furthermore, because the vault exclusively borrows wstETH, which is highly correlated with rsETH, the liquidation risk remains minimal.
Specification
Given these observations, we recommend increasing rsETH’s LTV and LT in E-Mode for both the Ethereum Prime and Core Instances.
| Asset | Chain | Market | Current LTV | Recommended LTV | Current LT | Recommended LT |
|---|---|---|---|---|---|---|
| rsETH | Ethereum | Main E-Mode | 92.5% | 93% | 94.5% | 95% |
| rsETH | Ethereum | Prime E-Mode | 92.5% | 93% | 94.5% | 95% |
Next Steps
We invite a community discussion around the proposed parameter updates and, barring community objection, will follow up with a Snapshot vote in five days.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0