Overview
Chaos Labs recommends reducing GHO’s IR curve and increasing the supply and borrow caps on Aave’s Ethereum Prime instance.
Motivation
Following a recent reduction in GHO’s IR curve on Ethereum Prime, we have observed continued underutilization of the market. The chart below illustrates GHO’s utilization alongside the target borrow rate (Base + Slope 1) and the effective borrow rate since January 17:
As it can be observed, even following the recent decrease in the rate to a Target Borrow Rate of 8.5%, utilization increased but still remained only around 15%, driving minimal supply-side interest rate growth. While, as we have outlined in the past, this issue can be obviated by withdrawing the current unutilized GHO Prime Facilitator funds from the vault until the borrowing demand grows, this measure of aligning the target borrow rate with the market’s demand still improves the efficiency of the market.
Additionally, GHO’s supply cap on the Ethereum Prime instance has reached 100% utilization, and its borrow cap is 75%.
The increase in supply is likely driven by the deposits into the aEthLidoGHO Balancer pool, as significant incentives have been allocated to it. We also expect an increase in borrow demand following the reduction of borrow target rate, making GHO the most attractive asset to borrow in the Prime instance.
Supply Distribution
While GHO’s supply distribution appears heavily concentrated among the top two wallets, the biggest position represents the Balancer aGHO wrapper contract that provides supply-side yield to the liquidity pool’s deposits. The second biggest supplier in the pool is currently represented by Aave’s GHO Prime Facilitator, who aims to improve GHO’s available liquidity in this instance. However, as the pool is underutilized, it unnecessarily dilutes the yield of user deposits, reducing the attractiveness of Balancer LPs.
As GHO cannot be used as collateral in the Ethereum Prime instance, no position represents liquidation risk.
Borrow Distribution
GHO’s Borrow distribution is heavily concentrated within the top 4 positions; however, thanks to the use of highly correlated assets, the liquidation risk remains limited.
The majority of the collateral used to borrow GHO is sUSDe, representing $3.54M or 94% of the GHO borrowed.
To stimulate borrowing demand for GHO, support the increased demand, and enable additional liquidity pool deposits on Balancer, we propose the following:
- 50 basis point (bps) reduction in GHO’s Base rate
- Increase GHO’s supply cap to 30,000,000 GHO
- Increase GHO’s borrow cap to 10,000,000 GHO
These adjustments will ensure that the borrow rates remain competitive, encouraging users to utilize the currently idle supply, and have been 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.
Additionally, to improve the adaptability of the GHO’s supply rate to wider market changes, we will recommend additional IR curve changes in the future to distance the base rate and slope 1 further. A similar change has been recently recommended to USDS on Ethereum Core in this post.
Specification
| Instance | Asset | Parameter | Current | Proposed |
|---|---|---|---|---|
| Ethereum Prime | GHO | Base | 6.00% | 5.50% |
| Instance | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum Prime | GHO | 25,000,000 | 30,000,000 | 5,000,000 | 10,000,000 |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.
Copyright
Copyright and related rights waived via CC0