Summary
Chaos Labs recommends lowering the target borrow rate for major stablecoins from 5.00% to 4.00% through a coordinated adjustment to Slope 1 across Aave V3 instances. Market data continues showing that stablecoin borrowing activity has not materially recovered following the prior rate reductions. Yield compression across on-chain instruments. including Ethena and yield-bearing stablecoins such as Syrup USDT, has further weakened the demand for stablecoin borrowing reducing utilizations across the board. In order to restore utilization to optimal levels, we therefore recommend adjusting the target borrow rates.
Motivation
Over the past several months, stablecoin supply across Aave V3 instances has remained broadly stable, while borrowing has continued to contract. This asymmetry has driven utilization further below the target range, as the borrow side of the market has failed to keep pace with steady liquidity on the supply side.
The decline in borrowing activity is not unique to Aave as it reflects a broader repricing of on-chain yield. Utilization rates across major stablecoins have continued to decline across instances, with most markets now operating well below the 80% threshold.
As a direct consequence, variable borrow rates have trended materially lower across the board. The existing Slope 1 configuration is no longer well-calibrated to the current demand environment as observed interest rates are primarily subpar to current targets.
The underlying driver of this dynamic is a broad-based compression of yields across on-chain instruments. Ethena’s sUSDe yields have remained subdued, diminishing the carry available from looping strategies. Similarly, yield-bearing stablecoins such as Maple’s syrupUSDT have seen their offered rates decline in line with the broader macro environment. With fewer high-yield opportunities available to borrowers, the incentive to lever up via Aave stablecoin markets has weakened considerably, and there is limited basis to expect a spontaneous recovery in borrowing demand under the current rate structure.
Additional Cases
While we generally aim to keep stablecoin interest rates aligned across instances, certain markets warrant individual treatment based on their specific demand dynamics. Specifically, USDC on Base shows persistent demand and high utilization, hence we recommend a smaller reduction of 50bps to 4.50%. Additionally, PYUSD borrowing on Ethereum Core is constrained primarily by the borrow cap rather than by borrowing costs, therefore reducing Slope 1 would result in even lower borrowing costs compared to other stablecoins. Hence, in order to align the asset with the rest of the market, we recommend aligning its configuration with RLUSD, which exhibits a similar dynamic, by setting the base rate and Slope 1 each to 2.50%.
Recommendation
Given the continued softening in leverage-driven demand and the structural compression of yields in the broader on-chain ecosystem, we recommend a further downward recalibration of Slope 1 across major stablecoin markets. Reducing the target variable borrow rate from 5.00% to 4.00% would better align protocol pricing with prevailing market conditions and restore the competitiveness of Aave’s rate offering relative to the available carry environment. This adjustment is expected to help stabilize utilization and support a more sustainable demand equilibrium under current macro conditions.
Specification
| Market | Asset | Current Slope 1 | Recommended Slope 1 |
|---|---|---|---|
| Ethereum Core | USDT | 5.00% | 4.00% |
| Ethereum Core | USDC | 5.00% | 4.00% |
| Plasma | USDT0 | 5.00% | 4.00% |
| Ethereum Core | USDe | 5.25% | 4.00% |
| Plasma | USDe | 5.25% | 4.00% |
| Base | USDC | 5.00% | 4.50% |
| Arbitrum | USDC | 5.00% | 4.00% |
| Ethereum Core | USDtb | 5.00% | 4.00% |
| Avalanche | USDC | 5.00% | 4.00% |
| BNB | USDT | 5.00% | 4.00% |
| Arbitrum | USDT0 | 5.00% | 4.00% |
| Ethereum Core | USDG | 6.00% | 5.00% |
| Avalanche | USDt | 5.00% | 4.00% |
| Optimism | USDC | 5.00% | 4.00% |
| BNB | USDC | 5.00% | 4.00% |
| Optimism | USDT | 5.00% | 4.00% |
| Celo | USDT0 | 5.00% | 4.00% |
| Linea | USDC | 5.00% | 4.00% |
| Sonic | USDC | 8.50% | 4.00% |
| BNB | FDUSD | 5.50% | 4.00% |
| Linea | USDT | 5.00% | 4.00% |
| Scroll | USDC | 5.00% | 4.00% |
| Celo | USDm | 5.00% | 4.00% |
| Avalanche | AUSD | 5.00% | 4.00% |
| Celo | USDC | 5.00% | 4.00% |
| Linea | mUSD | 6.50% | 4.00% |
| Ethereum Core | mUSD | 6.50% | 4.00% |
| Megaeth | USDT0 | 5.00% | 4.00% |
| Megaeth | USDm | 5.00% | 4.00% |
| Avalanche | USDe | 6.50% | 4.00% |
| Mantle | USDT0 | 5.00% | 4.00% |
| Mantle | USDC | 5.25% | 4.00% |
| Mantle | USDe | 5.00% | 4.00% |
| Gnosis | USDC.e | 5.00% | 4.00% |
| Market | Asset | Current Base Rate | Recommended Base Rate | Current Slope 1 | Recommended Slope 1 |
|---|---|---|---|---|---|
| Ethereum Core | PYUSD | 0.00% | 2.50% | 5.00% | 2.5% |
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.