title: [ARFC] upgrade Aave V3 ETH pool wETH parameters
author: @marczeller - Aave-chan Initiative, @Gauntlet
date: 2023-10-13
Summary
This ARFC proposes an update to the slope1 parameters of WETH in the Aave V3 Ethereum pool. With the stabilization of staking market, we believe it’s time to adjust the slope1 to better align with the current yields of stETH and reth.
Motivation
The current yields of stETH and reth have been observed at 3.3% and 3.07% respectively. By adjusting the slope1 parameter of WETH, we aim to:
Enhance Profitability in Leverage Loops: The proposed adjustment will make leverage loops more profitable for users.
Align with stETH and reth Yields: The adjustment aims to set the slope1 slightly below the current yields of stETH and reth, ensuring Aave remains competitive.
Increased utilization of ETH reserve is expected to partly compensate for the slight loss of protocol revenue due to lower interest rate equilibrium.
Specification
We propose two options for the slope1 parameters:
Conservative Option: Set slope1 to 3.2%. 10 bps below stETH yield but above rETH yield
Aggressive Option: Set slope1 to 2.8%. 50 below stETH yield & 23bps below rETH yield allowing both to be profitable.
Additionally, we propose reducing the optimalRatio to 80% to mitigate liquidity risks.
Gather community feedback on the proposed changes.
If consensus is reached, escalate this proposal to ARFC snapshot stage.
If ARFC snapshot outcome is YAE, escalate to AIP stage.
Disclaimer
The Aave-chan Initiative and Gauntlet are not presenting this ARFC on behalf of any third party and are not compensated by any LST platform for creating this ARFC.
Gauntlet has previously recommended to set WETH Uopt to 80% and Slope 1 to 3.3% for v3 Ethereum. We will add some additional color to the options with regards to how they affect borrowing rates and revenue.
On borrow rate / revenue changes
Below is a comparison of the two options with regards to revenue and borrow rates. We project new utilization to be the utilization under the new IR params such that the new borrow rates equal the current borrow rates.
option
new_slope1
new_uopt
current_util
current_borrow_rate
new_util
new_borrow_rate
current_borrow_revenue (WETH)
new_borrow_revenue (WETH)
Conservative
0.033
0.8
0.74
0.031
0.75
0.031
1363
1384
Aggressive
0.028
0.8
0.74
0.031
0.8
0.028
1363
1331
New WETH Slope 1 → 3.3%
projected annualized revenue increase around ~20 WETH
New WETH Slope 1 → 2.8%
projected annualized revenue decrease around ~32 WETH
reducing slope 1 to 2.8% may allow for up to 24k WETH new borrows collateralized by rETH
rETH currently mostly collateralizes stablecoin borrows, likely due to WETH borrow rates on v3 Ethereum exceeding rETH staking yield
On returning WETH Uopt from 90% to 80%
Returning WETH Uopt back to 80%, which will double the capacity for liquidations during extreme volatility.
WETH net withdrawals/deposits exhibit little correlation with market downturns.
have existed days where price drops ~10%, and net WETH supply also drop ~10%, such as 2022-05-10 and 2022-09-13
this suggests that future large downturns could be accompanied by supply contraction from large net withdrwals
Utilization has not been consistently > 80%, apart from the days leading up to the ETH merge, and the days following the recent WETH slope 1 decrease.
As a result, equilibrium utilization at 90% leaves less available room for liquidation capacity, especially if accompanied by net withdrawals.
As an update, option 2 (aggressive) passed in snapshot and AIP-368 is queued for execution. AIP-371 is a duplicate of AIP-368, so it should not be voted on.
