[ARFC] wstETH Borrow Rate Update


title: [ARFC] wstETH Borrow Rate Update
author: @TokenLogic
created: 2025-01-21


Summary

This publication proposes updating the wstETH Borrow Rate to support the adoption of LRTs across several instances of Aave v3.

Motivation

To support the listing of ezETH and rsETH across multiple Aave v3 instances, this proposal recommends lowering the wstETH Borrow Rate to promote adoption of the LRT/LST yield strategy. The adjustment will harmonize the wstETH Borrow Rate across all Aave v3 instances that support LRT collateral, except for the Core instance.

Several teams plan to introduce rewards to bootstrap growth across various Aave instances. While these incentives are necessary to meet users’ return expectations, they are not yet sustainable. Reducing the wstETH Borrow Rate allows teams to allocate their incentive budgets more effectively, supporting a larger AUM base and extending the duration of reward campaigns.

Increased utilization of the wstETH reserve is expected to enhance revenue generation for the Aave DAO while delivering higher returns for users participating in the wstETH/ETH yield strategy.

The proposed wstETH Borrow Rate parameters for Aave v3 instances (excluding the Core instance) are as follows:

Paramater Value
Base 0.00%
Slope1 0.75%
Slope2 85.0%
Uoptimal 90.0%

Due to the size of the wstETH reserve on the Core instance of Aave v3 on Ethereum, this instance is excluded from this proposal.

With LRTs already listed on Arbitrum, Base, Scroll, and zkSync, the proposed changes will be implemented on these networks first.

Future proposals that onboard LRTs to instances of Aave v3 that do not yet include LRTs, shall also include the the wstETH Borrow Rate update.

Specification

Update Arbitrum, Base, Scroll and ZKSync wstETH Borrow Rate:

Paramater Value
Base 0.00%
Slope1 0.75%
Slope2 85.0%
Uoptimal 90.0%

When implemented this proposal will harmonise the wstETH Borrow Rate with Prime instance of Aave v3 on Ethereum.

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

  1. Gather feedback from the community.
  2. If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
  3. If Snapshot outcome is YAE, escalate this proposal to the AIP stage.

Copyright

Copyright and related rights waived via CC0.

1 Like

A Snapshot vote has been created for this proposal.

Link to vote: here

Start: Jan 28, 2025 · 1:41 PM
End: Jan 31, 2025 · 1:41 PM

Thank you in advance to everyone that participates in the vote.

Summary

LlamaRisk supports this updated wstETH borrow rate parameter across the four networks. It is likely to achieve its intended purpose (to align wstETH borrow rates across markets) with few unintended consequences and may even boost revenue while decreasing interest rate volatility between networks.

Proposed Change

The existing and suggested rates are as follows across networks are as follows:

Parameter Arbitrum Scroll Base zkSync Proposed
Base 0.25% 0% 0% 0% 0.00
Slope1 4.5% 7% 7% 4.5% 0.75%
Slope2 80% 300% 300% 80% 85%
uOptimal 45% 45% 45% 45% 90%

The proposed interest rate model is identical to the wstETH on Prime.

Effects of change

By unifying these interest rate models across networks, Aave users should be able to avoid interest rate spikes as the Slope2 point reliably, and uOptimal are now the same.

Source: Proposed Interest Rate Visualization, LlamaRisk via Desmos

The new, unified interest rate is modeled above. Note the almost flat gradient up to 90% utilization, indicating that borrow rates for wstETH under this new model will be more stable and cheaper. This will power additional, predictable profitability from the LRT/LST trade, resulting in higher LRT TVL for Aave on these networks and additional fee generation.

It may also result in additional liquidity fragmentation between network instances as LRT/LST traders take advantage of different utilization rates across networks. This should mean cross-chain interest rate arbitrage will harmonize these rates across networks.

Risks of change

This unified interest rate model comes with potential risks. These include:

Interest rates may spike across all networks should utilization go past 90%. As identified in the model visualization above, the gradient is very steep, with a 1% increase in utilization from 90%, resulting in up to a 58% jump in interest rates. This could lead to market instability stemming from liquidations.

This introduces additional leverage into the system, dependent on the continued emission of LRT governance tokens such as $EIGEN. These emissions are variable, and the new model may result in decreased collateralization rates, resulting in additional systemic risk (and liquidation cascades) or vulnerability to LRT depegs. This is an intended consequence, but it must still be monitored.

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.

1 Like

As Michigan Blockchain, we support lowering the wstETH Borrow Rate across Aave v3 instances. We believe that this change will make borrowing wstETH more affordable and attract more users to LRT strategies like ezETH and rsETH. This is going to incentivize the strategy where users provide ezETH or rsETH as collateral and borrow wstETH to achieve a net positive APY, so the utilization of these restaking tokens will be incentivized as a result. This will also standardize borrowing costs across Aave v3 instances. Lower rates will further help teams running incentive programs stretch their budgets, which means greater liquidity and sustainability. Increased borrowing and utilization of wstETH should boost Aave DAO revenue while providing higher returns for users.

-Kerem Dillice and nsks

1 Like