From our perspective, the Interest Rate Risk Oracle is not solely about increasing AUM, but rather about ensuring Aave’s revenue remains strong, maintaining a balanced risk framework, and reducing governance overhead. There are a few key areas where we have a different view:
Operational Overhead of Manual Updates
We’d like to highlight that the claim that this thread is 9 days old with only one update progressed is inaccurate. The thread was actually 6 days old at the time of the response, and two updates have been successfully implemented, aligning with the expected timeline given the 3-day timelock for Risk Stewards’ changes.
Furthermore, it is unreasonable to expect these 0.5% changes to be performed manually over more than 50 assets across 14 different Instances every 3 days. This creates significant operational overhead for all parties involved with drafting, creating, and signing the transactions, consequently slowing down other necessary governance processes.
This emphasizes the need for Interest Rate Risk Oracles for the Aave DAO to handle this process more efficiently and minimize the operational overhead.
As the model’s inner workings and logic are explained on the forum, as they were here, and hence are readable and understandable by users, it creates a further layer of predictability for borrowers. The algorithm can also be adjusted to consider multiple factors, making it highly flexible and allowing for an optimal balance between Risk and Business decisions.
wstETH Utilization vs. Revenue
It is suggested that lowering wstETH supply yields led to an increase in utilization. While that may be true, it ignores the direct impact on revenue generation. As revenue is both a function of utilization and interest rate, maximizing utilization by continuously decreasing the interest rate, such as what was done for wstETH, did not mitigate the drop in revenue.
As it is visible from the chart below, the weekly revenue derived from LRT/wstETH looping within the Prime instance has reduced from $9K a week to $2K while maintaining the risk from the LRT assets unchanged and limited liquidity within the wstETH pool.
If there is no demand for lower rates, reducing them further is not a viable long-term strategy. The primary goal of the Prime instance should not just be attracting capital but ensuring sustainable and safe revenue generation for Aave DAO.
LRT Market-Wide Effects
While the algorithm for the Interest Rate Risk Oracle dynamically adapts to market conditions, it is still affected by the broader environment, and the recent outflow of LRTs has affected the market driving a constant downward pressure on wstETH supply rate and hence on the market utilization.
The claim that the AUM that left following the spike in wETH borrow rate had taken months to secure is inaccurate, as over 83% of the AUM that left following the spike, was driven by automated systems, of which Instadapp represents the majority share with over 77% of the funds being withdrawn. A significant portion of the funds that were withdrawn later returned following the adjustment of the curve.
These algorithms used by Instadapp to dynamically allocate the wstETH supply to the optimal markets also emphasize how the majority of the Prime Instance liquidity is both highly concentrated and highly mercenary, hence extremely sensitive to minimal changes.
wETH Collateralization is a New Factor
A major factor that led to the halting of the Prime instance growth was the inability for WETH to be used as a collateral within the market, and while this factor has now being resolved, the time since the change has been limited and hence the full impact of the change is still unfolding. We expect the future growth of the Prime Instance, now that stablecoin liquidity is present and WETH is enabled as collateral, to support the growth in demand from wstETH users going forward.