Chaos Labs Risk Stewards - Adjust USDT Interest Rate Curve on Aave V3 - 06.05.25

[ChaosLabs]

Summary

Chaos Labs recommends reducing the Slope2 parameter of USDT on Aave V3 Ethereum Core from 35% to 22.5%. The objective is to mitigate the extreme volatility in borrowing rates observed following significant supplier withdrawals and prevent disruptive rate spikes that impair borrower positions, particularly in rate-sensitive strategies.

Motivation

The recent activity by Huobi, the largest USDT supplier on Aave, resulted in a withdrawal of approximately 400 million USDT. This action abruptly pushed the market utilization to 100%, triggering the jump in variable borrow rates to above UOptimal and spiking borrowing costs to around 40%. This volatility directly impacts borrowers and strategies sensitive to rate changes, especially those involving Ethena PTs, which represent a significant portion of collateral currently backing USDT borrow positions.

Moreover, Huobi continues to hold a significant USDT balance on Aave, with approximately 1.19 billion USDT still deposited and available for potential withdrawal, previously representing 40% of the total aUSDT supply.

On-chain activity indicates a recurring pattern of weekly withdrawals and redeposits by Huobi, though the exact amounts vary significantly with respect to liquidity availability. In previous instances, Huobi has withdrawn up to 1 billion USDT in a single transaction. This time-deterministic withdrawal behavior contributes to causing interest rate volatility and reinforces the need for a less aggressive Slope2 parameter to accommodate such fluctuations without compromising borrower stability.

With USDT borrowing demand recently surging due to increased appetite for leverage, relative liquidity has thus remained more constrained amid elevated market utilization levels.

In previous instances of Huobi aUSDT withdrawals, such as on 05/16, led to significant temporary outflows of $500M in collateralized USDT debt due to significant utilization and thus interest rate spikes.

While it is unclear precisely what the observed strategy exogenously correlates to, this Huobi address persistently performs USDT redemptions whenever the price of USDT falls below $1, before redepositing USDT into Aave within a few days after.

USDT’s limited role as a collateral asset on Aave (with only ~$30M borrowed against it) means that high utilization poses minimal risk to the protocol in the context of hypothetical collateralized aToken debt liquidations. However, the knock-on effects of high borrowing rates, particularly for users relying on rate predictability, reduce Aave’s competitiveness as a borrowing venue for USDT and potentially drive away activity.

Specification

Asset	Market	Current Slope 2	Recommended Slope 2
USDT	Ethereum Core	35%	22.5%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Overview

Following a renewed wave of USDT withdrawals by Huobi, further exacerbating rate volatility, we propose temporary adjustments to the IR parameters for USDT on the Aave V3 Ethereum deployment. Specifically, Chaos Labs recommends increasing the UOptimal from 92% to 95% and concurrently reducing the Slope2 parameter from 22.5% to 14%. These changes are intended as short-term measures to buffer market stability during this period of heightened utilization, with the original parameters to be reinstated upon the anticipated redeposit of USDT by Huobi.

Raising the UOptimal to 95% will meaningfully reduce the magnitude of liquidity needed to revert utilization below the kink, thereby enhancing the responsiveness of interest rates. At current utilization levels of 97%, with a total USDT supply of $3.51B and a UOptimal of 92%, the system requires either $150M in debt repayments or supply deposits to normalize rates. Increasing UOptimal to 95% reduces this requirement to approximately $50M, allowing smaller market actions to achieve faster rate corrections.

To maintain a consistent rate gradient in the post-kink region under the revised curve, a reduction in Slope2 to 14% is proposed. These parameter modifications are explicitly designed as temporary stabilization measures. Chaos Labs intends to revert to the existing USDT interest rate model once the supply-side liquidity is sufficiently restored.

Recommendation

Asset	Market	Current Slope 2	Recommended Slope 2	Current UOptimal	Recommended UOptimal
USDT	Ethereum Core	22.5%	14%	92%	95%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Summary

Chaos Labs recommends reverting the Slope2 parameter of USDT on Aave V3 Ethereum from 14% to 22.5% and UOptimal from 95% to 92% following significant new deposits.

Motivation

Earlier this week, HTX, the largest USDT supplier on Aave, withdrew approximately 800 million USDT, which abruptly pushed the market utilization to 100%, triggering the jump in variable borrow rates to above UOptimal and spiking borrowing costs to around 40%. As a result, we responded with two actions: first reducing Slope 2 to 22.5%, then reducing Slope 2 to 14% and increasing UOptimal to 95%.

However, beginning on June 10, the HTX account began depositing in the market again, beginning first with a 300M deposit, then adding more than 400M USDT total across multiple transactions

As a a result, utilization in the market has fallen to 86.2% as of this writing, far below the new UOptimal of 95%.

To account for this significant change in the market, we propose reverting USDT’s IR curve to its parameters from before the withdrawal was conducted: increasing Slope 2 and decreasing UOptimal.

Specification

Asset	Market	Current Slope 2	Recommended Slope 2	Current UOptimal	Recommended UOptimal
USDT	Ethereum Core	14%	22.5%	95%	92%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Summary

Chaos Labs recommends reducing the Slope2 and increasing the UOptimal parameters for USDT and WETH on Aave V3 Ethereum following withdrawals by Huobi and increased demand for leverage. Specifically, we propose reducing Slope2 to 14% for USDT, 60% for WETH on Core and 65% for WETH on Prime instance. Additionally we proposre increasing UOptimal to 93% for WETH on Core and to 92% for WETH on Prime.

Motivation

Huobi withdrew approximately 700 million USDT and 30,000 WETH from Aave V3 Ethereum, sharply increasing utilization on both assets. These actions have led to heightened interest rate volatility and elevated borrowing costs, impacting users reliant on rate stability.

At the same time, we observe increased demand for leverage across DeFi markets, further contributing to high utilization levels on Aave. In this context, preserving stable and predictable borrowing costs is critical for supporting healthy market functioning and user retention. We plan to provide a more detailed analysis on the overall increase in borrowing demand observed across the markets in a separate post, alongside optimal risk parameterization associated with such an increase.

To mitigate short-term rate spikes we propose temporary adjustments to the interest rate curves. These changes aim to soften the slope beyond the kink and expand the buffer before high rates are triggered.

We intend to revert these parameters once utilization levels normalize in accordance with traditional Huobi market operations.

Specification

Asset	Market	Current Slope2	Recommended Slope2	Current UOptimal	Recommended UOptimal
USDT	Ethereum Core	22.5%	14%	92%	-
WETH	Ethereum Core	80%	60%	90%	93%
WETH	Ethereum Prime	85%	65%	90%	92%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Summary

Following an additional withdrawal of 300M USDT from Huobi, Chaos Labs recommends increasing the UOptimal of USDT on Aave Ethereum Core to 95% in order to mitigate the short term interest rate volatility.

Specification

Asset	Market	Current UOptimal	Recommended UOptimal
USDT	Ethereum Core	92%	95%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[PDRML]

Hi @ChaosLabs , Huobi keeps withdrawing all of their ETH from the Aave WETH market (Ethereum Core), having withdrawn another ~60k ETH within the last 12 hours. They still have around 23k ETH to withdraw while utilization is already at close to 95%. Very reckless behavior from them doing that on a low liquidity Friday night…

A temporary solution to stabilize rates could be, as has already been proposed for the USDT market, an UOptimal adjustment to 95% for the WETH market (Ethereum Core mainly, but potentially also for Ethereum Prime). What’s your analysis and opinion on that, would that be a viable short term solution?

[CryptoScam]

What about adjusting USDe curve…

[ChaosLabs]

Summary

Chaos Labs recommends reducing the Slope2 and increasing the UOptimal parameters for WETH on Aave V3 Ethereum Core and Prime following more withdrawals by HTX and increased demand for leverage.

Specifically, we propose reducing Slope2 by 20pp for both markets and increasing UOptimal by 1pp for WETH Ethereum Core.

Motivation

HTX continued withdrawing WETH from Aave V3 Ethereum, sharply increasing utilization and increasing borrow rates. The largest withdrawal was of 43K WETH, or about $150M. The wallet maintains a balance of 22.63K WETH alongside 1.06B USDT as of this writing, raising the possibility that they could withdraw more WETH.

The withdrawn ETH appears to have been moved to an HTX Hot Wallet before being moved to a Binance Deposit address, making it unclear whether this supply will return to Aave.

Arkham

When WETH borrow rates are high, users leveraging LSTs and LRTs with WETH are pushed into unprofitability. This may lead these users to unwind their positions, generally necessitating swapping the derivative for WETH on the open market. This can cause deviations form the peg, as has been observed in the (w)stETH market, for example, though the deviation is relatively minor and does not pose a threat to the protocol because of its use of fundamental pricing.

This has also been observed in the (w)eETH market, though again the deviation is relatively minor and does not pose a risk to the protocol.

However, while these depegs do not pose a risk to the protocol, it is in the interest of general market stability and a positive user experience on Aave to mitigate borrow rate spikes, especially on a highly leveraged asset.

Ethereum Core

ETH’s recent strong price performance has led to an increase in the USD value on both sides of the market, with suppliers increasingly borrowing stablecoins alongside growth in WETH borrowed against wstETH and weETH.

Thus, unlike other periods of high utilization which may be caused by price declines, the market is not at risk of large-scale liquidations that could further increase utilization, with a relatively gentle liquidation curve.

To put these values into perspective, at current price and supply levels, the buffer between a 94% UOptimal and full utilization would be just over $500M. This allows us to recommend a temporarily more permissive market, in which the UOptimal can be further increased.

Ethereum Prime

The Prime market has not displayed a similar increase in leverage taken against supplied WETH, putting the market in a less risky position from the standpoint of liquidations.

The amount of liquidations that would take place in the event of a price crash are negligible, again allowing us to recommend an increase to the market’s UOptimal.

Recommendation

To reduce interest rate volatility we propose temporary adjustments to the interest rate curves which aim to further soften the slope beyond UOptimal and reduce stress on borrowers.

We intend to revert these parameters once utilization levels normalize, whether through HTX redepositing or through normal market operations. A permanent solution to address these periods of rate volatility caused by HTX’s activities is being developed.

Specification

These changes currently cannot be implemented because of a Risk Steward timelock triggered by previous changes to this market. However, when the timelock expires tomorrow, we recommend implementing the following changes:

Asset	Market	Current Slope2	Recommended Slope2	Current UOptimal	Recommended UOptimal
WETH	Ethereum Core	60%	40%	93%	94%
WETH	Ethereum Prime	65%	45%	92%	-

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[CryptoScam]

@ChaosLabs Would you consider answering or this is not part of the tasks you’re paid for?
The USDe curve is utterly bad with spikes to 20-25% for 6 hours every night for the last 3ish weeks.
A good risk provider would have already adjusted the IR parameters for this market…

[ChaosLabs]

Summary

Chaos Labs recommends rolling back recent changes to USDT’s IR curve on Ethereum Core and increasing WETH’s Slope1 on Core and Prime to begin the process of rolling back recent changes to its IR curve.

Motivation

USDT

USDT rose above its UOptimal point last week because of HTX-related withdrawals discussed in previous posts. This caused borrow rates to temporarily fluctuate, briefly rising above 15%. As a result, we recommended changes to USDT’s IR curve that were implemented, namely the reduction of Slope2 from 22.5% to 14%.

As displayed above, utilization has fallen to an acceptable level because of new deposits, shown in the bottom panel. The HTX account is largely responsible for these new inflows, depositing significant sums of USDT beginning on July 16.

Chaos Labs Dashboard

However, because the borrow rate has been stabilized, we are now able to recommend returning USDT’s Slope2 to 22.5%. We are currently developing an automated solution that can be utilized to reduce instances of rate volatility necessitating multiple IR curve adjustments.

WETH — Ethereum Core

Similarly, the WETH Core market experienced significant outflows, largely due to the same HTX-related account. These outflows, however, have not returned, and have continued this week. In aggregate, 437K aWETH outflows stemming from two interlinked Huobi accounts have occurred, of which, in aggregate, only 27K aWETH remains.

This has caused significant rate volatility as utilization has consistently risen, the result of less elastic demand relative to USDT because of the high proportion of leveraged yield farming in this market. The associated demand response stemming from leveraged LST/LRT collateralized debt positions with such thin margins makes it such that the primary mechanism of action to neutralize interest rate spikes stems from deleveraging with significant notional size, leading to adverse second order affects such as market price deviations and liquidity contractions, and thus an uptick in protocol duration risk via exit-queue deposits.

To reduce volatility in the market and prepare to return the market to its original UOptimal, we recommend “flattening” the IR curve by increasing Slope1 slightly, to 3%, and reducing Slope2. Additionally, we recommend increasing UOptimal by 1pp to mitigate current rate fluctuations.

WETH — Ethereum Prime

While the WETH market in Prime is significantly smaller and has not experienced large outflows, there has been an increase in utilization causing rate volatility in recent days.

To reduce the rate fluctuations above UOptimal, we recommend decreasing Slope2.

Specification

Asset	Market	Current Slope1	Recommended Slope1	Current Slope2	Recommended Slope2	Current UOptimal	Recommended UOptimal
USDT	Ethereum Core	5.5%	-	14%	22.5%	92%	-
WETH	Ethereum Core	2.7%	3.0%	40%	20%	94%	95%
WETH	Ethereum Prime	Risk Oracle	-	45%	25%	92%	-

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Summary

Following our previous update to the WETH Core market IR curve, we are now proposing an adjustment to align more closely with current market conditions. As detailed in our previous update, these parameters were introduced to address sustained high utilization and rate volatility stemming from HTX-linked outflows that reduced supply.

WETH — Ethereum Core

Our prior adjustment increased Slope 1 from 2.7% to 3.0% and raised UOptimal to 95%. This change was intended to flatten the interest rate curve and reduce volatility above optimal utilization during a period of elevated outflows and market instability. The steeper slope 1 helped temper the borrow demand until additional supply was deposited by introducing stronger rate pressure on borrowers.

With market conditions now more stable, and the WETH utilization on Ethereum Core dropped below 92% we recommend gradually rolling back the previous changes to reintroduce a sufficient liquidity buffer between UOptimal and full utilization. We therefore propose adjusting our utilization target to a UOptimal value of 94%.

Simultaneously, we are also proposing a slight reduction in Slope1 to 2.90%. To target a profitable WETH borrow rate at the target utilization, while still discouraging excessive usage above target UOptimal without introducing unnecessary cost pressure below it.

Specification

Asset	Market	Current Slope 1	Recommended Slope 1	Current UOptimal	Recommended UOptimal
WETH	Ethereum Core	3.00%	2.90%	95%	94%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Summary

Following our previous updates to the WETH Core market IR curve, we are now proposing another adjustment to align more closely with current market conditions. As detailed in our previous updates, these parameters were introduced to address sustained high utilization and rate volatility stemming from HTX-linked outflows that reduced supply.

WETH — Ethereum Core

Our prior adjustments increased Slope 1 from 2.7% to 3.0% and raised UOptimal to 95%. This change was intended to, and was successful at, reducing interest rate volatility during a period of elevated outflows and market instability. However, this was intended to be temporary, and our most recent adjustment — reducing Slope 1 and UOptimal — has not created any additional rate volatility.

With continuing stable market conditions and decreasing WETH utilization, we recommend continuing to gradually roll back the increases, reintroducing a sufficient liquidity buffer between UOptimal and full utilization. We therefore propose adjusting UOptimal to 93%.

Simultaneously, we recommend a slight reduction in Slope1 to 2.80%, which will create a profitable WETH borrow rate at the target utilization, while still discouraging excessive usage above target UOptimal.

Specification

Asset	Market	Current Slope 1	Recommended Slope 1	Current UOptimal	Recommended UOptimal
WETH	Ethereum Core	2.90%	2.80%	94%	93%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Summary

Following our most recent update to the WETH Core market IR curve, we propose a further adjustment to align with the current, improved market conditions. As described in prior proposals, the previous changes were enacted to stabilize rates during a period of elevated utilization driven by HTX-linked outflows and reduced supply.

WETH — Ethereum Core

Our prior changes have reduced UOptimal from 95% to 93% and lowered Slope1 from 3.00% to 2.80%, reintroducing a healthier liquidity buffer while maintaining attractive yields at the target utilization. This adjustment proved effective, as utilization stabilized and interest rate volatility remained minimal.

Since then, we have seen:

• Further market inflows and net debt repayments, increasing liquidity availability.

• Notable improvement in the peg stability of LSTs and LRTs, reducing liquidity fragmentation and further supporting healthy market functioning.

• Borrow rates converging toward the previous market-priced equilibrium, in line with staking reward dynamics.

  

Given these developments, we recommend continuing the gradual rollback of temporary rate curve increases.

Specification

Parameter	Current	Proposed
UOptimal	93%	92%
Slope1	2.80%	2.70%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0

[ChaosLabs]

Overview

Following a renewed wave of 1B USDT withdrawals by Huobi, further exacerbating rate volatility, we propose temporary adjustments to the IR parameters for USDT on the Aave V3 Ethereum deployment. Specifically, Chaos Labs recommends increasing the UOptimal from 92% to 94% and concurrently reducing the Slope2 parameter from 22.5% to 14%. These changes are intended as short-term measures to buffer market stability during this period of heightened utilization, with the original parameters to be reinstated upon the anticipated redeposit of USDT by Huobi.

Specification

Asset	Market	Current Slope 2	Recommended Slope 2	Current UOptimal	Recommended UOptimal
USDT	Ethereum Core	22.5%	14%	92%	94%

Next Steps

We will move forward and implement these updates via the Risk Steward process.

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.

Copyright

Copyright and related rights waived via CC0