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
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