# \[ARFC\] Update stETH and WETH Risk Params on Aave v3 Ethereum, Optimism and Arbitrum **URL:** \ **Category:** Governance\ **Created:** [January 12, 2024, 4:24pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168 "2024-01-12T16:24:41Z")\ **Posts on this page:** 8\ **Page:** 1
**Author:** ![ACI](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/aci/32/4780_2.png) [@ACI](https://governance.aave.com/u/ACI)\ **Post date:** [January 12, 2024, 4:24pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/1 "2024-01-12T16:24:41Z")
# 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 1. If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage. 2. If ARFC snapshot approved, then escalate to AIP Stage. # Copyright Copyright and related rights waived via [CC0](https://creativecommons.org/publicdomain/zero/1.0/). ---
**Author:** ![ACI](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/aci/32/4780_2.png) [@ACI](https://governance.aave.com/u/ACI)\ **Post date:** [January 17, 2024, 3:30pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/3 "2024-01-17T15:30:20Z")
Following this proposal, next stage is [ARFC Snapshot](https://snapshot.org/#/aave.eth/proposal/0xb8790aeb32267062c1500deb613ad15ebd5deac4d78d1786cb1690c12d0512c9) , that we have just published now. Vote will start tomorrow, we encourage everyone to participate. ---
**Author:** ![ChaosLabs](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/chaoslabs/32/6850_2.png) [@ChaosLabs](https://governance.aave.com/u/ChaosLabs)\ **Post date:** [January 18, 2024, 3:22pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/4 "2024-01-18T15:22:42Z")
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. ---
**Author:** ![Gauntlet](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/gauntlet/32/4064_2.png) [@Gauntlet](https://governance.aave.com/u/Gauntlet)\ **Post date:** [January 19, 2024, 1:17pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/5 "2024-01-19T13:17:26Z")
# Gauntlet Analysis 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](https://governance.aave.com/t/gauntlet-recommendation-for-weth-uopt-on-ethereum-v3/14802). 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 ![image](https://hackmd.io/_uploads/BJwTzmwYa.png) #### WETH Utilization on OP v3 ![image](https://hackmd.io/_uploads/r1zlmmDt6.png) #### WETH Utilization on ARB v3 ![image](https://hackmd.io/_uploads/SyeLXXPta.png) ### 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](https://governance.aave.com/t/gauntlet-synchronicity-price-adapter-killswitch-functionality-for-lst-emode/13224) and until community has aligned on next steps with the new Correlated-asset Price Oracle [functionality](https://governance.aave.com/t/bgd-correlated-asset-price-oracle/16133). 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. | Supply Rate APR | ETH Market | OP Market | ARB Market | | --- | --- | --- | --- | | Current | 1.29% | 1.44% | 1.13% | | Projected | 1.37% | 1.53% | 1.19% | ---
**Author:** ![MarcZeller](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/marczeller/32/7124_2.png) [@MarcZeller](https://governance.aave.com/u/MarcZeller)\ **Post date:** [January 20, 2024, 12:52pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/6 "2024-01-20T12:52:48Z")
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. ---
**Author:** ![ACI](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/aci/32/4780_2.png) [@ACI](https://governance.aave.com/u/ACI)\ **Post date:** [January 22, 2024, 6:52am UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/7 "2024-01-22T06:52:03Z")
Following snapshot monitoring, the [ARFC Snapshot](https://snapshot.org/#/aave.eth/proposal/0xb8790aeb32267062c1500deb613ad15ebd5deac4d78d1786cb1690c12d0512c9) has passed with YAE as winning option with 652K votes. Nevertheless, as stated by @MarcZeller, if the DAO agrees next step would be publication of two separate AIPs to reflect latest changes. ---
**Author:** ![ACI](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/aci/32/4780_2.png) [@ACI](https://governance.aave.com/u/ACI)\ **Post date:** [January 30, 2024, 1:36pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/8 "2024-01-30T13:36:15Z")
This proposal has passed the [AIP stage](https://vote.onaave.com/proposal/?proposalId=11&ipfsHash=0x2fa324a635a80a4f64b8636199440b6ef8687135aa81ccf396570eb8aecc7bed) and go live tomorrow. ---
**Author:** ![ACI](https://dub1.discourse-cdn.com/flex013/user_avatar/governance.aave.com/aci/32/4780_2.png) [@ACI](https://governance.aave.com/u/ACI)\ **Post date:** [January 30, 2024, 1:36pm UTC](https://governance.aave.com/t/arfc-update-steth-and-weth-risk-params-on-aave-v3-ethereum-optimism-and-arbitrum/16168/9 "2024-01-30T13:36:19Z")