Our methodology does not support the supply cap increase for WSTETH. Our LST methodology does not support increases in supply cap beyond 50% circulating supply until the killswitch is implemented. If the community wishes to proceed with WSTETH they should move towards AIP.
However, Gauntlet recommends against increasing STMATIC supply cap, because it adds excess risk to the protocol. STMATIC on Polygon v3. is already > 60% of the total circulating supply. Despite CSPA improvements, liquidity remains a big risk factor for STMATIC due to the significant amount of non-emode borrows STMATIC supports.
- STMATIC liquidity has decreased due to Balancer pool vulnerabilities (the historical largest STMATIC pool is no longer processing swaps), and is low relative to the supply cap.
- The STMATIC-WMATIC recursive borrowing strategy is not profitable. STMATIC yields are currently 4.2%, WMATIC borrowing cost is 5.4% with 0.4% incentives.
- The 2023.08.30 influx in STMATIC cap usage has not contributed to material additional WMATIC borrowing, likely due to the unprofitability.
As a result, additional STMATIC supply cap may facilitate risky stablecoin borrowing rather than less risky emode-borrowing. Stablecoin borrowing is riskier than WMATIC emode borrowing, due to the significant differences in correlation with STMATIC.
If the goal is to facilitate greater WMATIC borrowing, the IR curve for WMATIC should be lowered to reduce borrowing costs, which we have proposed here and discuss more in detail about the above risks. This both promotes significant increased revenue via emode borrowing and helps reduce liquidity risk factors associated with STMATIC.
