Overview
Following a significant growth in demand for AVAX on Aave V3 Avalanche Instance, combined with a shift in users’ behaviour, Chaos Labs aims to improve interest rate stability and market efficiency through gradual increases of AVAX and WETH.e Slope 1 parameters.
AVAX Market Dynamics
Over the past 90 days, both the total supply and borrow amounts of AVAX have increased significantly. The supply has grown from 5.63M to 14.52M, while the borrow amount has risen from 2.33M to 5.56M.
The supply side has been primarily dominated by a set of whales creating substantially large AVAX collateralized WETH.e debt positions, accounting for, in aggregate, $166M worth of AVAX (70% of all aTokens) coupled with $70M of WETH debt, thereby in tandem contributing to 96% of all WETH.e borrowing demand.
Simultaneously, the borrow side of AVAX has grown proportionally, thanks to reduced borrow costs. The growth has been primarily composed of sAVAX, which currently represents roughly 75% of AVAX borrows, totaling $75.5M.
As shown in the chart below, sAVAX supply has increased significantly over the past 90 days as a consequence of the looping behaviour, rising threefold from 1.5M at the end of March 2025 to 4.5M today.
From a broader economic standpoint, the recent expansion in AVAX supply has been met with proportionate growth in borrowing activity. This equilibrium has resulted in a relatively stable aggregate utilization rate, fluctuating between 28% and 38%, despite meaningful increases in absolute supply and borrow volumes. While this reflects balanced market participation and healthy protocol scaling, the flat utilization trend indicates untapped capacity within the system. To drive utilization toward the optimal 65% target and improve overall capital efficiency, it is beneficial to implement targeted demand-side incentives that enhance the attractiveness of borrowing, particularly in the current rate environment.
At the moment, even with supplementary incentives, AVAX borrow rate at Uoptimal currently exceeds the yield from sAVAX, making the looping strategy net unprofitable before utilization can reach the optimal threshold. With the sAVAX yield at 5.08% and the AVAX borrow rate at Uoptimal at 5.72%, the incentive to pursue looping strategies diminishes as utilization increases, particularly when factoring in the amplified delta premium associated with AVAX’s volatility.
WETH.e Borrowing Demand
On the flip side, the aforementioned AVAX whales contributing to substantial WETH borrowing demand have scaled the market over 3x in the last month through persistent, rate-agnostic directional pair trading, contributing to a highly distributed set of aToken suppliers in response to such demand.
As such, over the past three months, WETH.e borrow rates on Avalanche have shown periodic volatility, with an average borrow rate of 14%, leading to predominant market convergence above the kink, especially prior to the stalling of WETH.e borrow cap increases due to aggregate market risk. Due to the relatively flat Slope 1, which causes rates to remain low across most of the curve before rising sharply after the Uoptimal, the associated rate volatility is amplified, and thus small changes in utilization around this point can lead to noticeable shifts in borrow rates.
With a lack of ETH-denominated LSTs whitelisted on the Avalanche market and thus rate-dependent yield-bearing collateral, adjusting Slope 1 upward in alignment with observed market demand aims to smooth out the rate curve, allowing borrowing costs to align in accordance with demand for shorting WETH.e. This approach enhances the protocol’s ability to price risk appropriately, reduce rate volatility, and better align incentives with prevailing market conditions.
Recommendation
In light of this, we propose a downward adjustment to the Slope 1 parameter for AVAX, with the goal of reducing the borrow rate at Uoptimal to a level below the current sAVAX yield. This would help ensure that users maintain a consistent incentive to borrow and continue engaging in the looping strategy up to the optimal utilization threshold. And an upward adjustment to the Slope 1 parameter of WETH.e, with the goal to mitigate borrow rate volatility and more accurately price market risk.
Specification
AVAX & WETH.e Interest Rate:
| Asset | Market | Current Slope 1 | Recommended Slope 1 |
|---|---|---|---|
| AVAX | Avalanche | 4.72% | 4.00% |
| WETH.e | Avalanche | 2.70% | 3.70% |
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