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 In previous instances, Huobi has withdrawn up to 1 billion USDT in a single transaction.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