Overview
A proposal to:
- Increase the borrow cap of WETH on the Plasma Instance
- Increase the supply cap of weETH on the Plasma Instance
All cap increases are backed by Chaos Labs’ risk simulations, which consider user behavior, on-chain liquidity, and price impact, ensuring that higher caps do not introduce additional risk to the platform.
WETH (Plasma)
WETH reached its borrow caps on the Plasma instance shortly after its last increase through Risk Stewards. At the time of writing, the supply and borrow caps are 160 and 20 thousand tokens, respectively. The recommended parameters were achieved in close collaboration with the Plasma team, aiming to optimize collateral distribution and enhance user retention.
Borrow Distribution
The borrow distribution of WETH exhibits high concentration, as the top user represents approximately 50% of the pool, while the top 5 accounts for over 70%. The distribution of health factors is clustered around 1.2; however, the major positions maintain a healthier 1.5 and above, which at the moment does not present a significant liquidation risk.
The users are primarily collateralizing their WETH debt positions with USDT0, likely to maximize their exposure to ongoing incentives.
Liquidity
At the time of writing, WETH on-chain liquidity on Plasma is mostly allocated in a Uniswap V3 pool, which has over 2,500 WETH and 6 million USDT0.
Additionally, the Plasma protocol team has established a $300M liquidation backstop to ensure efficient execution of liquidations on the Aave Plasma instance during periods of market stress. Chaos Labs will provide additional analysis covering the impact of this liquidation backstop.
Recommendation
Considering the substantial demand for borrowing the asset, the conservative user behavior of the top positions, indicated by the health factors, along with the on-chain liquidity complemented by the liquidation backstop commitment, we recommend increasing the asset’s borrow cap to facilitate further growth of the instance.
weETH (Plasma)
weETH has reached its supply cap of 40,000 tokens on the Plasma instance, indicating additional uncaptured demand to utilize the asset.
Supply Distribution
The supply distribution of weETH is highly concentrated, as the top user represents over 75% of the market, while the top 2 users account for over 95% of the total. The health factors of the top users are in the safe 1.9 - 2.0 range, substantially limiting the risk of large-scale liquidations.
At the time of writing, weETH is used predominantly to collateralize USDT0 debt; however, we expect a significant portion of demand to be driven by leveraged restaking strategies in the future. This is likely not present in the market due to insufficient WETH borrowing capacity, which, as mentioned, has been filled rapidly.
Liquidity
Currently, weETH has only one pool with substantial TVL and no direct pairing to USDT0, which represents the largest debt asset associated with this collateral. However, we expect LRT looping demand to increase when the WETH caps are raised. Therefore, both weETH/WETH and weETH/USDT0 liquidity must be considered, which is allocated primarily in the following pools:
- WETH/USDT0 Uniswap ($17M TVL)
- WETH/weETH Balancer ($26M TVL)
Additionally, as previously mentioned, the Plasma protocol team has established a $300M liquidation backstop to ensure efficient execution of liquidations on the Aave Plasma instance during periods of market stress, and weETH is included in the supported assets for said commitment.
Recommendation
Given the substantial demand for using the asset as collateral, additional upcoming WETH borrowing capacity, and deep on-chain liquidity complemented by the liquidation backstop commitment, we recommend increasing the supply cap of weETH on the Plasma instance.
Specification
| Market | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Plasma | WETH | 160,000 | - | 20,000 | 40,000 |
| Plasma | weETH | 40,000 | 80,000 | - | - |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
Disclosure
Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.
Copyright
Copyright and related rights waived via CC0.