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.