Summary
Chaos Labs strongly supports the proposal to adjust the interest rate parameters for WETH and wstETH across Aave v3’s Lido and Main instances. This proposal is expected to improve capital efficiency in the Lido pool and optimize utilization of wstETH in the Main pool.
Motivation
Lido Instance (WETH Borrow Rate Increase)
The proposal seeks to increase the WETH Slope1 on the Ethereum Lido instance to 2.75%. We believe this adjustment will improve the pool’s capital efficiency and enable the DAO to better redirect WETH supply incentives in the future.
With the anticipated launch of ezETH impacting demand for wstETH, we estimate the wstETH supply rate could be increased by up to 0.09%, based on the proposed ezETH listing parameters.
However, we expect 40,000 ezETH deposits to be sufficient to offset the 0.25% increase in WETH Slope1 proposed. Given the recent integration of compounded EIGEN rewards into ezETH’s underlying APY, we foresee strong borrow demand for wstETH. Therefore, we anticipate that the increased WETH Slope1 will be quickly balanced by the additional supply APY generated from wstETH.
Even without the additional demand from ezETH, users leveraging wstETH yield could still benefit from a looped APY of up to 10%, factoring in the existing wstETH deposit incentives and the proposed WETH borrow rate.
Main Instance (wstETH Borrow Rate Decrease)
The proposal seeks to lower the wstETH Slope1 on the Ethereum Main instance to 2.00% and reduce the wstETH Base to 0%. We consider this reduction effective in incentivizing rsETH/wstETH looping by making wstETH borrowing more attractive. The reduction in Base is particularly beneficial, as it enables rsETH looping to become profitable even with the narrow APY margin between rsETH and wstETH.
Given the current implied yield of wstETH and the proposed listing parameters of rsETH, we anticipate the borrowing rate for wstETH to reach up to 0.17%. This minimal rate will help maintain a favorable environment for users to loop rsETH and wstETH. This approach would also enable users to achieve a maximum looping APY of 15%, well above the market average, thereby driving liquidity and usage in the pool.
Recommendation
We agree with these proposed parameter changes. Chaos Labs will further monitor these parameters post-implementation and recommend supply caps that are in line with them.
Proposed Parameter Adjustments
| Asset | Market | Parameter | Current Value | Proposed Value |
|---|---|---|---|---|
| WETH | Ethereum Lido | Slope1 | 2.50% | 2.75% |
| wstETH | Ethereum Main | Slope1 | 4.50% | 2.00% |
| wstETH | Ethereum Main | Base | 0.25% | 0.00% |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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