[ARFC] wstETH Supply Cap Increase Arbitrum v3

Governance
1

title: [ARFC] wstETH Supply Cap Increase Arbitrum v3
author: @Llamaxyz - @TokenLogic
created: 2023-04-06

Summary

This publication proposes increasing the wstETH Supply Cap on Arbitrum v3 from 4.65k unit to 17.35k units.

Abstract

The wstETH Supply Cap on Arbitrum v3 is at 100% utilisation. This publication presents the community an opportunity to raise the wstETH Supply Cap by around 373% to 17.35k units.

There is ample liquidity for wstETH to wETH to USDC swaps to occur when liquidating the largest wstETH holdings. At the time of writing, wstETH supply on Arbitrum is 34,699.59 units, 50% of the supply is 17.35k units.

Motivation

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The utilisation of wstETH on Arbitrum is at 100%. The current Supply Cap of 4.65k units is equivalent to 13.4% of supply on Arbitrum. Increasing the cap to 50% of circulating Supply would increase the Supply Cap to 17.35k units. Given the relative small Supply Cap in place, this publication seeks to increase the Supply Cap by 373%, to 17.35k units.

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19,00 wstETH can be swapped to USDC for 1.01% price impact via Paraswap on Arbitrum. The swap routing highlights that the wstETH to stable coin swap is routed via wETH. Essentially, the wstETH Supply Cap can be likened to wETH’s Supply Cap. The current wETh Supply Cap is 70k units.

This compares favourably when the largest aARBwstETH holding is 960.3 units, details shown below.

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Increasing the wstETH Supply Cap to 17.35k units will enable approximately 11.43k units of wETH to be borrowed with a 90.00% LTV value via the ETH eMode. This assumes 100% of wstETH is deposited for the sole purpose of maximising yield. If this was to occur, the wETH Borrow Cap will likely need to be increased.

With the Borrow Cap for wETH able to be increased from 11.17k to 20k units, and the wstETH Supply Cap being increased, users will be able to enter the yield maximising strategy. Based upon current liquidity conditions there is a lot of upside for the wstETH / wETH yield maximising strategy on Arbitrum v3.

With reference to the new ARFC Aave V3 Caps update Framework it is possible to ship several upgrades to gradually increasing Aave’s exposure to wstETH over time.

Specification

The following risk parameters have been proposed by Llama for the community to review and discuss in the comments section.

Ticker: wstETH

Contract: arbitrum: 0x5979D7b546E38E414F7E9822514be443A4800529

Parameter Current Value Proposed Value
SupplyCap 4.65k units 17.35k units

Copyright

Copyright and related rights waived via CC0.

5 Likes
2

Thanks for bringing this one to the table, sorely needed!

3

I love this deal.

it’s very strange to increase the same token at optimism, but no any increase on arbitrum.

arbitrum 4,650 for a long time .

Vs

Recent vote

Optimism wstETH 6,000 12,000

4

We do not support an immediate increase of the caps to the recommended figures in the post, which would represent a 373% increase. Our standard practice is to gradually increase caps while closely analyzing usage and position distribution in an iterative process.

For wstETH on Arbitrum, the two largest suppliers (wallet1, wallet2) are currently utilizing their wstETH collateral to borrow WBTC and USDC. By utilizing our stress testing framework, we found that increasing the wstETH supply by 2X, to a cap of 9,300, does not increase the VaR of the system. However, we need to observe how new positions are distributed. For example, we anticipate more leveraging of the wstETH-ETH loop on E-Mode, similar to that seen on other networks. We keep monitoring protocol risk using our stress-testing scenarios, based on the current position distribution, usage, and trends.

Given the above, we recommend increasing the supply cap by 2X to 9,300.

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3 Likes
5

Thank you @ChaosLabs.

We will amend our proposal and proceed to AIP. We support the iterative nature of increasing Supply Caps as we balance the need to attract builders to Aave and ensuring users are protect with sound risk parameters.

As wstETH on Arbitrum grows, we can always present the community the opportunity to further increase the Supply Cap. Thanks again.

1 Like
6

Arbitrum

WSTETH

4.65K

supply was used 100% again , sole supplier whale wallet 4650wstETH cover 50% of this pool now .
so far there is no solution to prevent such huge risk potential ?

what’s your thought now ?

7

Hi @pcx,

Please see our initial analysis and proposal in response to the supply cap being filled within minutes of the AIP being executed on Arbitrum.

8

Hi @Llamaxyz, we responded on this thread for increasing wstETH supply cap.