Chaos Labs Risk Stewards - Change of Supply and Borrow Caps on Aave V3 - 18.03.26

[ChaosLabs]

Summary

A proposal to:

• Increase the supply and borrow caps of WETH on the Mantle Instance
• Increase the supply cap of sUSDe on the Mantle Instance
• Decrease the supply cap of CELO on the Celo 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 (Mantle)

WETH has reached its 60,000 token supply cap on the Mantle instance. Demand for WETH borrowing continues to be driven by leveraged staking strategies, primarily by wrsETH collateral users; additionally, the market has become subject to significant incentives bringing the supply rate to over 3%.

Supply Distribution

The supply distribution of WETH is moderately concentrated, with the top supplier representing approximately 60% of the market. As can be observed below, the majority of positions maintain health factors above 1.5, indicating relatively conservative positioning on the supply side with borrowing primarily concentrated in stablecoins like USDe, USDT and USDT0.

Borrow Distribution

The WETH borrow distribution is highly concentrated, with 4 users accounting for the majority of outstanding debt. These users collateralize WETH debt with wrsETH, capitalizing on the yield differential between the restaking yield and borrowing costs. Health factors cluster tightly in the 1.02 to 1.06 range; given the strong correlation between wrsETH and WETH, such positioning presents limited liquidation risk.

Liquidity

WETH liquidity is primarily allocated within Merchant Moe paired primarily with its derivatives like cmETH, mETH and wrsETH. The cumulative TVL of the mentioned pools is approximately $3 million.

Recommendation

Given the persistent demand to utilize WETH on Mantle, limited liquidation risk, and adequate on-chain liquidity, we recommend increasing both the supply and borrow caps of WETH on the Mantle instance.

sUSDe (Mantle)

sUSDe has reached its supply cap of 240 million tokens on the Mantle instance, reflecting the sustained demand observed across multiple prior cap increases. Growth continues to be driven by leveraged looping strategies where users recursively supply sUSDe to borrow USDT0.

Supply Distribution

The supply distribution of sUSDe remains highly concentrated, with the top user accounting for approximately 60% of the market. The asset is used primarily in leveraged looping strategies, where, by recursively collateralizing stablecoin debt with a yield bearing collateral, users increase the net size of positions thereby increasing their exposure to the spread between the underlying yield of sUSDe and borrow costs of USDT0. Health factors for the majority of positions are in the 1.02 to 1.05 range, which, given the high correlation between collateral and debt assets, presents limited liquidation risk.

Liquidity

sUSDe liquidity remains primarily concentrated in sUSDe/USDe pools on Merchant Moe and Agni Finance, with TVLs of approximately $8.5 and $4 million respectively. While these figures are modest relative to the reserve size, the high correlation between sUSDe and USDT0 substantially constrains the liquidation risk, meaning the available liquidity is sufficient to support a further increase of the supply cap.

Recommendation

Given the persistent demand to deploy sUSDe in leveraged looping strategies, combined with limited liquidation risk and sufficient on-chain liquidity depth, we recommend increasing the supply cap of sUSDe on the Mantle instance.

CELO (Celo)

The CELO market on the Celo instance has experienced minimal organic usage and negligible market demand, with total supply currently standing at approximately $169.58K. Given the lack of meaningful activity and the shrinking size of the asset, we recommend reducing the supply cap of CELO to effectively deprecate the asset on the Celo instance. Additionally, as the Aave V3.7 update will remove the isolation module along with debt ceiling functionality, we will no longer be able to constrain the volume of debt that can be accumulated against the asset. Given the low on-chain liquidity and lack of substantial trading activity associated with CELO, the risk of price manipulation is elevated, which, in the absence of debt ceiling constraints, would materially increase the protocol’s exposure to bad debt. We therefore recommend setting the supply cap to 1 to deprecate the market.

Specification

Instance	Asset	Current Supply Cap	Recommended Supply Cap	Current Borrow Cap	Recommended Borrow Cap
Mantle	WETH	60,000	80,000	56,000	74,000
Mantle	sUSDe	240,000,000	320,000,000	-	-
Celo	CELO	9,000,000	1	-	-

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.

[MconnectDAO]

I have gone through this proposal carefully and honestly the data speaks for itself.

WETH and sUSDe caps on the Mantle instance did not hit their limits because of speculation or artificial activity. They hit because people are actually using the protocol. That is the kind of organic demand you want to see and the Chaos Labs simulations give me confidence that this is not a case of growth outpacing risk management. The correlation between collateral and debt assets on both markets keeps liquidation risk contained. And on CELO, closing out a dead market before the V3.7 update removes the debt ceiling guardrail is exactly the right call. Proactive, not reactive. I support this proposal passing.

That said, support does not mean silence on the risks and I want to flag a few things I would ask the risk committee to keep a close eye on as these caps go live.

The first thing that stands out to me is concentration. One wallet holds roughly 60 percent of both the WETH and sUSDe supply markets. That is not a red flag that should block this proposal but it is a structural fragility that becomes more consequential as caps increase. A single large exit or forced liquidation at higher cap levels is a very different event than the same scenario today. The protocol has not stress tested what that looks like at the new scale and I think it should.

The second thing is the health factors. Borrowers running between 1.02 and 1.06 are doing so intentionally because these are leveraged strategies and the math works until it does not. At expanded caps the positions will simply be larger. A modest price move that was manageable before could trigger cascading liquidations at a scale this instance has never experienced. The tightness is by design but tight has limits and those limits matter more when the numbers are bigger.

The third thing is liquidity. Around 3 million dollars TVL for WETH and around 12 million for sUSDe are workable numbers right now but the caps are being pushed to 80,000 and 320 million respectively. The committee should be actively stress testing whether that liquidity can absorb a forced unwind at the new scale and not just assume that what worked at current positions will hold at larger ones.

My ask is simple. Pass this because the demand is real and the caps are justified. But treat these three things as active monitoring priorities going forward. The growth here is genuinely encouraging. The vigilance needs to grow with it.