Overview
This proposal recommends a reduction in the supply caps, borrow caps, and debt ceilings for a set of underutilized assets across Aave V3 deployments. These adjustments are informed by observed on-chain demand patterns and broader protocol risk considerations. Additionally, the proposal includes the effective freezing of select reserves where usage metrics and risk signals justify such action.
Motivation
This proposal introduces risk parameter updates aimed at improving alignment between protocol configuration and current market conditions, particularly in markets exhibiting persistently low utilization or evolving risk profiles. Specifically, we recommend freezing the SNX and FRAX reserves across all Aave V3 instances, alongside supply and borrow cap reductions for ENS, LDO, CAKE, 1INCH, WXDAI, as well as the majority of supported assets on the Scroll, zkSync, and Linea deployments.
These changes follow Chaos Labs’ standard risk methodology, which includes setting supply caps at approximately 2–3× current on-chain utilization, with borrow caps calibrated to target sustainable utilization levels. The approach mirrors prior ARFC updates and reflects a proactive stance toward maintaining protocol safety and capital efficiency.
SNX and sUSD
SNX’s market on Aave has seen limited activity and presents structural concerns due to recent ecosystem events. Notably, Synthetix’s stablecoin sUSD experienced a significant depeg in April 2024 (trading as low as $0.77), leading to the asset’s market freeze on Aave V3 Optimism. Relevant research on this topic can be found here. Additionally, Synthetix plans to acquire the Derive platform via a token swap, potentially inflating SNX supply and creating price effects. Given minimal SNX borrowing and near-zero stablecoin debt against it ($9K), we recommend reducing supply and borrow caps to 1 to near-freeze the asset, with outstanding debt positions hypothetically able to take out new debt. However, we do not support such
In similar fashion, we recommend continuing with the deprecation of sUSD on Optimism by setting its supply cap to 1, finding that it has continued to remain below its peg and its utilization has continued to decrease following a successful soft-deprecation.
1INCH
1INCH’s supply and borrow cap utilization has recently increased, leading us to recommend increasing its supply cap. However, its debt ceiling utilization has not scaled proportionally, as shown below.
Taking this into account, we recommend decreasing 1INCH’s debt ceiling to $1M, better aligning this parameter with the asset’s utilization and aggregate targeted risk exposure relative to outstanding supply cap.
FRAX
The Frax protocol is undergoing significant structural changes as outlined in Frax Finance’s North Star Proposal. Under this proposal, the FRAX stablecoin is being rebranded to Legacy Frax Dollar whereby it effectively will be migrated to a new frxUSD stablecoin with one-way 1:1 redeemability, and the governance token FXS has adopted the FRAX branding, becoming the primary governance and gas token within the Fraxtal ecosystem. This fundamental shift signals a migration of ecosystem focus away from the original FRAX stablecoin, with its total supply monotonically decreasing accordingly.
FRAX across all Aave V3 deployments has shown persistently low relative utilization.
Nominally speaking, across all instances, the total utilization on Aave is a total of 664K supplied and 577K borrowed, with just $483 in debt collateralized by FRAX given its LTV0 status.
Ethereum
Avalanche
Arbitrum
Given the strategic realignment and continued low activity across Ethereum, Arbitrum, and Avalanche, we propose effectively freezing the asset by decreasing supply and borrow caps on all instances to 1. Coupled with the lack of collateralization, this will create the same effect as outright freezing the asset, to be performed through the risk steward.
ENS
ENS’s Ethereum V3 market is underutilized, with a large withdrawal in April, leaving the caps unnecessarily high. We propose substantially lowering supply and borrow caps and reducing the isolation mode debt ceiling to reflect current demand, leaving room for organic growth. At the moment, there exists just $2.7K of isolated stablecoin debt collateralized by ENS.
LDO
LDO experienced substantial withdrawals in March, causing supply cap utilization to drop. Given limited borrow demand and stablecoin borrowing against LDO collateral, we recommend lowering LDO’s supply and borrow caps proportionally to recent usage and reducing its debt ceiling.
Cake
While Cake’s supply has been growing, it remains well below its current supply cap. We propose reducing its supply and borrow caps, providing adequate room for growth while better controlling exposure.
WXDAI
WXDAI’s current caps significantly exceed its usage, prompting our recommendation to revert supply and borrow caps to more conservative levels, balancing demand with available liquidity.
Scroll, zkSync, and Linea
Aave V3’s new Layer-2 deployments (Scroll, zkSync, and Linea) show consistently low adoption and liquidity. We recommend reducing all asset caps proportionally (generally ~3× current supply), significantly limiting exposure while preserving room for gradual growth. These reductions proactively manage risk given current low utilization and liquidity profiles.
On Scroll, cap utilization has continued to decrease for all assets following our recent cap decreases. As a result, we recommend continuing to decrease caps on this deployment.
zkSync has also experienced consistent outflows, with some minor reversals, primarily in the ZK market which has since continued to fall. We recommend decreasing the caps on this deployment to a level that still allows for organic growth.
Finally, Linea’s caps are mostly under-utilized, though the WETH market has had a relatively consistent supply. There has also been some growth in WBTC and weETH supply. We will recommend slightly more lenient caps for the assets which have shown growth. On the borrow side, we recommend reducing the caps for all assets.
Specification
The table below summarizes current and proposed parameter changes:
| Deployment | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap | Current Debt Ceiling | Recommended Debt Ceiling |
|---|---|---|---|---|---|---|---|
| Ethereum | 1INCH | 18,000,000 | - | 475,200 | - | $4,500,000 | $1,000,000 |
| Ethereum | ENS | 600,000 | 100,000 | 40,000 | 20,000 | $3,900,000 | $1,000,000 |
| Ethereum | LDO | 8,000,000 | 5,000,000 | 1,500,000 | 500,000 | $7,500,000 | $2,500,000 |
| BNB Chain | CAKE | 2,400,000 | 1,200,000 | 1,200,000 | 600,000 | $7,000,000 | $3,500,000 |
| Gnosis | WXDAI | 36,000,000 | 12,000,000 | 36,000,000 | 10,000,000 | - | - |
| Linea | USDC | 12,000,000 | 3,000,000 | 11,000,000 | 2,700,000 | - | - |
| Linea | USDT | 7,800,000 | 1,000,000 | 7,150,000 | 900,000 | - | - |
| Linea | WBTC | 25 | 20 | 12 | 2 | - | - |
| Linea | WETH | 2,400 | - | 2,200 | - | - | - |
| Linea | ezETH | 2,400 | 1,200 | 1 | - | - | - |
| Linea | weETH | 1,200 | 1,000 | 1 | - | - | - |
| Linea | wstETH | 800 | 150 | 400 | 75 | - | - |
| Scroll | SCR | 1,080,000 | 750,000 | 36,000 | 28,000 | - | - |
| Scroll | USDC | 10,000,000 | 6,000,000 | 9,000,000 | 5,400,000 | - | - |
| Scroll | WETH | 30,000 | 15,000 | 27,000 | 13,500 | - | - |
| Scroll | weETH | 35,000 | 15,000 | 1 | - | - | - |
| Scroll | wstETH | 4,500 | 2,000 | 1,300 | 1,000 | - | - |
| zkSync | USDC | 15,000,000 | 3,000,000 | 13,500,000 | 2,700,000 | - | - |
| zkSync | USDT | 2,000,000 | 1,000,000 | 1,800,000 | 900,000 | - | - |
| zkSync | WETH | 7,000 | 3,000 | 5,600 | 2,700 | - | - |
| zkSync | ZK | 150,000,000 | 125,000,000 | 20,000,000 | 10,000,000 | - | - |
| zkSync | sUSDe | 400,000 | 200,000 | - | - | - | - |
| zkSync | weETH | 300 | 200 | - | - | - | - |
| zkSync | wstETH | 3,200 | 2,000 | 240 | 200 | - | - |
| Ethereum | SNX | 4,500,000 | 1 | 300,000 | 1 | - | - |
| Optimism | sUSD | 2,000,000 | 1 | 1 | - | - | - |
| Ethereum | FRAX | 2,500,000 | 1 | 2,000,000 | 1 | - | - |
| Arbitrum | FRAX | 1,452,000 | 1 | 1,140,000 | 1 | $1,000,000 | - |
| Avalanche | FRAX | 300,000 | 1 | 270,000 | 1 | $1,000,000 | - |
Next Steps
We will implement this set of risk updates through the Risk Steward.