[ARFC] Updating weETH Risk Parameters

Proposal parameters updated following service providers feedback

Title: [ARFC] Updating weETH Risk Parameters

Author: MarcZeller - ACI

Date: 2024-04-18


This proposal aims to update the risk parameters and interest rate strategy of the weETH asset on the Ethereum pool to boost Aave DAO revenue and encourage collateral adoption.


The successful onboarding of EtherFI into Aave has demonstrated significant demand for weETH usage as both collateral and a borrowing asset, with both initial supply caps reached in minutes and second cap increases filled under similar conditions. To accommodate this demand and facilitate protocol growth, this proposal suggests increasing the supply cap of weETH on the Ethereum pool and the borrow cap at 35% of the new supply cap amount. This proposal also aims at changing the interestRate Strategy to place the optimal ratio at 35% of liquidity.

Expanding borrow capacity will result in a higher collateral yield, which in turn creates a positive flywheel effect on supply and demand. By maintaining the borrow cap at an optimal ratio (35%) of the supply cap, we can balance risk, available liquidity, and LP yield effectively.

We also propose to increase weETH RF to 45% to contribute to Aave DAO revenue.


Chain Asset Current Supply Cap Recommended New Supply Cap Current Borrow Cap Recommended New Borrow Cap
Ethereum weETH 16,000 84,000 800 29500
Chain Asset Current Optimal ratio Recommended optimal ratio Current reserve factor Recommended New reserve factor
Ethereum weETH 45% 35% 15% 45%

Next Steps

  1. Gather consensus from the community and risk service providers.
  2. Escalate to ARFC Snapshot vote stage.
  3. If the Snapshot vote outcome is YAE, escalate to AIP stage for formal implementation.


This proposal has been created independently by the ACI without external compensation or incentives.


Copyright and related rights waived via CC0


While I do think that the new supply cap seems pretty high and liquidity could be a problem, with the new recommended optimal ratio and higher RF this proposal shouldn’t bring in any risk for the protocol.

But I would still like to see Chaos and other risk provider analysis.


How are these numbers chosen? It would be good to have some more transparency and discussion on the general principles for how we are thinking about caps/exposure here. Especially as this will likely continue to pop up for these type of assets going forward.



Chaos Labs supports updating weETH’s parameters on Aave V3 Ethereum.


From Aave’s standpoint, the pricing methodology for weETH and its non-vault-standard counterpart, eETH, maintains a near 1:1 valuation with ETH to minimize unwarranted liquidations. This approach is robust, akin to the methodology used for LSTs, as it anticipates a return to the mean in the event of a temporary market price depeg. This expectation is reinforced by the asset’s ability to be withdrawn through the Ethereum staking exit queue at a 1:1 ratio, ensuring liquidity and stability.

Additionally, there is significant liquidity available for withdrawal, with over 40.6K WETH accessible at a faster rate than the staking queue, within the native liquidity pool. This represents more than 5% of the total eETH supply, and acts similarly to the Lido buffer, in the event of a surge in withdrawal requests. Moreover, there is over 15K weETH liquidity provided on-chain underneath the parameterized liquidation bonus, and has averaged over 25.8M in daily volume.

Considering weETH’s nearly exclusive utilization in e-mode and the anticipated increase in its usage, reliance on underlying liquidity becomes less crucial. Instead, the focus shifts primarily to interest accumulation over time to render a respective position eligible for liquidation.


However, not all LRTs can adopt the same methodology. Take for example, the situation with ezETH, where the inability to withdraw ETH through the Ethereum staking queue, along with a sub-optimal native token launch announcement, caused the ezETH/ETH price feed to depeg to less than 0.8, and contributed to mass cascading liquidations accordingly. Assets with such qualitative shortcomings and uncertainties about their pricing expectations would not employ similar characteristics, let alone be listed as a viable, e-mode-affiliated collateral asset on Aave.

Screenshot 2024-04-24 at 18.17.13

Borrow Cap

Considering the proposed general borrow cap increase to 35% of the supply cap, it is anticipated that most of this utilization will stem from delta-neutral users in e-mode. This expectation arises from the historically low utilization of vault-standard LSTs, primarily due to the added borrowing costs associated with them. These users are likely to engage in speculative farming activities to accumulate points, mirroring the behavior observed in current borrowers.

Untitled - 2024-04-25T001539.029

Under the unlikely scenario where this approach is predominantly used with other collateral assets however, there’s adequate liquidity for debt-side liquidations. This liquidity stems from the capability to atomically mint weETH through WETH and execute liquidations accordingly. Essentially, during a liquidation, the swap from collateral asset to weETH debt doesn’t depend on the on-chain liquidity of weETH. If needed, the swap path would be collateral asset → WETH → weETH, with a 1:1 credit for the latter. Hence, concerning liquidations, it’s akin to treating WETH as the debt asset, especially in cases of substantial liquidations where on-chain weETH liquidity might be insufficient to the upside.

For a collateralized weETH debt asset liquidation to be delayed, two highly improbable events must occur simultaneously: first, a temporary weETH market price depeg exceeding the liquidation bonus of a collateral asset, and second, a collateralized weETH debt position qualifying for liquidation. However, our confidence in the expectation of reversion, combined with conservative asset parameterization outside of emode, assures us that this extreme scenario is unlikely to lead to bad debt accrual.

Uoptimal and Reserve Factor

From a revenue perspective, we suggest raising the reserve factor to 45%. The substantial demand for weETH as a collateral asset eliminates the need for extra interest incentives to attract suppliers. Concurrently, setting the Uoptimal in line with the proposed borrow cap at 35% creates a suitable buffer against possible large concentration and withdrawal events.


Considering these factors alongside the calculated oracle pricing, the decision to increase supply and borrow caps carries minimal economic or liquidity risk. The primary risks associated with weETH pertain more to smart contract vulnerabilities, centralization concerns, and slashing events, which fall outside the scope of our engagement. Ultimately, the community will determine how to address these risks and whether they necessitate more conservative parameters.

Risk Steward Cap Increases

Given the above and the asset’s relatively short track record, we seek to understand community sentiment regarding exposure to weETH before proceeding with further cap increases via the Risk Steward process. Should the community opt to accept these risks under the outlined assumptions, similar to our approach with LSTs across Aave platforms, we will be ready to continue facilitating additional increases in the caps via the risk steward process.


The following proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

1 Like

After Snapshot monitoring, the current ARFC Snapshot just ended, reaching both Quorum and YAE as winning option with 547K votes.

Next step will be the publication of an AIP to get final confirmation for a formal implementation.

How long does execution take from the moment you publish an AIP for final confirmation? do we need another vote?

The AIP needs to be written, checked and then published. Then a vote will happen again and after successfull vote it will be published.

1 Like

any updates about AIP?