Overview
Chaos Labs recommends reducing the wstETH Base Interest Rate from 1.00% to 0.50% on the Lido Instance and modifying the AGRS WETH interest rate algorithm to optimally account for external reward mechanisms and demand sources.
Motivation
Given the recent decline in ezETH’s intrinsic yield, we recommend adjusting the wstETH Base interest rate to 0.5% instead of the proposed 1%. This adjustment aims to prevent a substantial outflow of ezETH from the Lido instance while allowing the interest rate curve to support a balanced borrow demand.
As evidenced by the slower rate of deposit since the latest ezETH supply cap increase, demand for leverage has declined, likely due to the reduction in EIGEN rewards and, consequently, the underlying yield of ezETH. While the implied value of Renzo Points still enables profitable looping, raising the Base rate to 1% would double the current borrowing cost and disrupt the market’s equilibrium. Such a shift could drive significant ezETH looping activity away from Aave. Hence, we recommend reducing the wstETH base borrow rate to 0.5%.
ezETH supply vs supply cap
Specification
We recommend the following changes to wstETH on Ethereum’s Lido instance:
| Parameter | Current Value | Previously Recommended Value | Recommended Value |
|---|---|---|---|
| Base | 0.00% | 1.00% | 0.50% |
WETH interest rate strategy update - AGRS
In addition, the spread parameter between Lido staking rewards and WETH slope_1 update logic via AGRS has been adjusted from 0.5% to 0%, meaning the borrowing rate at optimal utilization will now directly match Lido’s stETH yield. This change implicitly incorporates the wstETH deposit yield, which effectively reduces the net borrowing cost.
This update ensures better alignment between borrowing costs and staking rewards. The rest of the pilot parameters remain unchanged, and a full analysis will follow the one-month testing period.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this ARFC.
Copyright
Copyright and related rights waived via CC0