[ARFC] wETH & wstETH - Borrow Rate Updates

Governance
2

Summary

LlamaRisk supports this rate update. The increased WETH Slope1 parameter enables the removal of liquidity incentives, as organic WETH borrowing demand on Aave V3 Lido is now sufficient to sustain market activity.

The impact of rsETH collateral onboarding on wstETH borrowing demand in the Aave V3 main market remains uncertain, making it premature to determine if the Slope1 reduction will be sufficient. A stepped approach is recommended.

Based on the proposed changes, we provide calculations showing the expected borrow rate and utilization ranges.

Lido instance - WETH Slope1 rate increase

For WETH on Aave V3 Lido, we analyzed two extreme scenarios with the proposed 25bps Slope1 increase: maximum user sensitivity to borrowing rates and maximum user sensitivity to utilization. Our projections show utilization is expected to decrease from 84.47% to a minimum of 80.65%, while the borrowing rate is expected to increase from 2.48% to a maximum of 2.67%.

Borrow rate Utilization
Current 2.48% 84.47%
Max borrow sensitivity (=) 2.48% (-) 80.65%
Max utilization sensitivity (+) 2.67% (=) 84.47%

LlamaRisk, October 23rd, 2024

Main instance - wstETH Slope1 rate decrease

For wstETH on the Aave V3 main market, we analyzed two extreme scenarios with the proposed 275bps Slope1 decrease: maximum user sensitivity to borrowing rates and maximum user sensitivity to utilization. Our projections show the borrowing rate is expected to decrease from 0.47% to a minimum of 0.09%, while utilization is expected to increase from 2.19% to a maximum of 11.75%.

Borrow rate Utilization
Current 0.47% 2.19%
Max borrow sensitivity (=) 0.47% (+) 11.75%
Max utilization sensitivity (-) 0.09% (=) 2.19%

LlamaRisk, October 23rd, 2024

Details on methodology

We model the Slope1 component of the Interest Rate Model (IRM) as an affine function y = ax + b, where:

  • y represents the borrowing rate
  • a represents the Slope1 rate
  • x represents the utilization rate
  • b represents the base borrow rate

Given points A=(0; b) and B=(uOptimal; Slope1 rate), we calculate a using a = (y_B - y_A)/(x_B - x_A). We then analyze two extreme scenarios: solving for utilization rate x using current borrowing rate y (maximum borrowing sensitivity) and solving for borrowing rate y using current utilization rate x (maximum utilization sensitivity).

These projections assume rational market behavior under perfect conditions, with all other variables remaining constant. The model is valid only when utilization remains below uOptimal, above which the Slope2 component requires separate modeling.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

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