Title: [ARFC] Update stETH and WETH Risk Params on Aave v3 Ethereum, Optimism and Arbitrum
Author: ACI ( Aave Chan Initiative)
Date: 2024-01-12
Summary
This ARFC proposes to update sETH and WETH risk parameters on the Aave V3 Ethereum Mainnet, OP Mainnet and Arbitrum.
Motivation
We propose updating the stETH and WETH risk parameters to be optimal and competitive in the current market landscape. This will maintain Aave’s position as the prime liquidity protocol by increasing our protocol attractiveness for users looking to maximize their capital efficiency.
Specification
The proposed changes update some risk parameters on stETH and WETH.
stETH E-Mode Ethereum
Update ETH-correlated E-Mode parameters with the following values.
Risk Parameter
Current Value
Proposed Value
Loan To Value (LTV)
90%
93%
Liquidation Threshold
93%
95%
We propose no changes to the stETH non-E-Mode parameters.
wstETH E-Mode Arbitrum
Update ETH-correlated E-Mode parameters with the following values.
Risk Parameter
Current Value
Proposed Value
Loan To Value (LTV)
90%
93%
Liquidation Threshold
93%
95%
Liquidation Bonus
2%
1%
We propose no changes to the stETH non-E-Mode parameters.
wstETH E-Mode Optimism
Risk Parameter
Current Value
Proposed Value
Loan To Value (LTV)
90%
93%
Liquidation Threshold
93%
95%
We propose no changes to the stETH non-E-Mode parameters.
WETH Ethereum
Risk Parameter
Current Value
Proposed Value
Reserve Factor
15%
10%
Optimal Ratio
80%
90%
Other parameters will remain unchanged.
WETH Arbitrum
Risk Parameter
Current Value
Proposed Value
Reserve Factor
15%
10%
Optimal Ratio
80%
90%
Other parameters will remain unchanged.
WETH Optimism
Risk Parameter
Current Value
Proposed Value
Reserve Factor
15%
10%
Optimal Ratio
80%
90%
Other parameters will remain unchanged.
Disclaimer
The ACI is not presenting this ARFC on behalf of any third party and is not compensated for creating this ARFC.
Next Steps
If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
If ARFC snapshot approved, then escalate to AIP Stage.
Chaos Labs supports this proposal to increase e-mode parameter values on Ethereum, Optimism, and Arbitrum, and set the WETH UOptimal to 90%.
As Aave naturally prices LSTs 1:1 in accordance with the underlying ETH, and utilizing the price sync adapter, there does not exist any theoretical risk pertaining to LST market price movement leading to liquidations. As such, in a pre-killswitch and correlated asset price oracle world, we can assume the effective maximum LST market price deviation “buffer” is sufficient, especially with the relative flow of emode liquidations (or lack thereof) and empty withdrawal queue.
Here is Gauntlet’s recommendation to the propose parameter adjustments:
LB Recommendation
Gauntlet supports decreasing the liquidation bonus to 1% for ETH e-Mode in Arbitrum.
Optimal Ratio Recommendation
Gauntlet does not recommend increasing the Optimal Ratio to 90% as it leaves less room for liquidations during volatile market conditions. We provided a detailed analysis on this within this forum post. Furthermore, the current utilization conditions for WETH on Ethereum, Arbitrum, and Optimism do not support capital efficiency improvement to the markets with utilization less than 70% across the markets.
WETH Utilization on ETH v3
WETH Utilization on OP v3
WETH Utilization on ARB v3
LT/LTV Recommendation
Gauntlet does not recommend increasing the LT/LTV for eMode on ETH,ARB, and OP markets until the implementation of a killswitch functionality and until community has aligned on next steps with the new Correlated-asset Price Oracle functionality.
With Aave’s oracle utilizing exchange rate instead of market pricing of LSTs, we need to be aware of the inherent risk the protocol is taking in the event of a LST price dislocation. These increases to LTV/LT would reduce the collateral buffer without any mechanism to prevent the risks being address with the kill switch and correlated-asset price oracle. As such, Gauntlet recommends to hold off on any increases to the emode LT/LTV until these risk mechanisms have been implemented/decided by the community.
Reserve Factor Recommendation
Gauntlet does not recommend decreasing reserve factors based on information provided by OP. Decreasing the reserve factor by 5% has large implication to reserve generation to the protocol as shown in the below table utilizing current market utilization:
Annualized Reserves
ETH Market
OP Market
ARB Market
Current
$3,315,425.68
$107,552.79
$232,253.53
Projected
$2,210,283.79
$71,701.86
$154,835.69
For wETH LP on Ethereum market, we would potentially be decreasing reserve generation by a minimum of $1M.
Decreasing the reserve factor would generate a higher supply rate for WETH suppliers thus attracting more suppliers to the protocol, but with the current utilization of the WETH markets, this action does not seem necessary since utilization is not near optimal ratio.
During discussions with other service providers for Aave DAO, we have come to the conclusion that implementing this proposal would need to balance attractiveness and DAO revenue.
It has been suggested that the implementation of risk parameter updates should be prioritized before making any RF changes, and that collecting market data on risk parameter changes before implementing RF changes would be prudent.
If the DAO agrees, this proposal will be carried out in two separate AIPs. The first AIP will involve immediate changes to the risk parameters, while the second AIP will be published later for RF changes.
