Overview
In light of recent market changes, Chaos Labs recommends decreasing the Slope 1 parameter for stablecoins by 0.5 percentage points. These changes will be implemented through the Risk Steward process.
Motivation
There has been continued underutilization of stablecoin markets on Aave V3, the result of both tightening market conditions and stablecoin supply inflows. The chart below shows the utilization of stablecoins on each Aave V3 chain, weighted by each stablecoin’s supply (i.e., USDT factors in more heavily than DAI on Ethereum). Additionally, the lines are weighted by the total stablecoin supply on each instance.
Despite numerous IR changes between February 1 and today, the weighted utilization on nearly all chains has rarely risen above 70% (ZkSync is the exception because of large supply outflows).
sUSDe
Some of this change can be attributed to a reduction in sUSDe as collateral, driven by reduced funding rates that have compressed the asset’s yield and made it less lucrative to loop against stablecoins, especially USDT. The chart below shows sUSDe as collateral against USDT in green.
USDT on Ethereum Core
This trend thus relies on broader crypto market performance. When speculative activity is high, funding rates are elevated, increasing sUSDe’s yield and its usage on Aave as collateral.
New Deposits
While borrowing demand has remain stable outside of sUSDe collateralize debt, there has been a rapid increase in supply, largely driven by a single account linked to the exchange HTX. Since April 1, the account has increased its supplied USDT amount by $1.48B.
The account occasionally removes large sums of its USDT, which is easily visible above, as well as on the market’s overall supply chart.
Coupled with the reduction in sUSDe-linked borrowing described above, this activity has put downwards pressure on USDT’s utilization rate.
However, the large fluctuations in the amount of USDT this account is supplying make it important to not decrease the market’s target borrow rate too significantly, which could potentially put the market above UOptimal when supply is removed. This would be especially negative for the PT token users described below, as well as sUSDe loopers.
PT Tokens
Finally, potentially helping reverse the trend of low utilization, the recent introduction of two USD-linked PT tokens — PT-eUSDe and PT-sUSDe — have been met with massive demand, leading to a quick increase in the amount of USDC and USDT borrowed.
PT-eUSDe
PT-sUSDe
We will continue to facilitate responsible increases to these assets’ supply caps, which is likely to continue increasing borrow demand for stablecoins.
Recommendation
Given these three factors, we recommend a measured decrease in the target borrow rate at UOptimal. Specifically, we recommend decreasing the target rate for all native stablecoins by 0.5 percentage points.
Please note that GHO, USDS, pyUSD, and bridged stablecoin versions are to be managed separately and are not included in these recommendations. Additionally, after syncing with Growth SPs, we will refrain from performing changes to the Polygon Instance.
Specification
| Protocol | Instance | Asset | Current Slope1 | Rec. Slope1 |
|---|---|---|---|---|
| Aave V3 | Ethereum Core | USDC | 6.00% | 5.50% |
| Aave V3 | Ethereum Core | DAI | 6.00% | 5.50% |
| Aave V3 | Ethereum Core | USDT | 6.00% | 5.50% |
| Aave V3 | Ethereum Core | LUSD | 6.00% | 5.50% |
| Aave V3 | Ethereum Core | FRAX | 6.00% | 5.50% |
| Aave V3 | Ethereum Core | crvUSD | 6.00% | 5.50% |
| Aave V3 | Ethereum Core | USDe | 6.00% | 5.50% |
| Aave V3 | Ethereum Prime | USDC | 6.00% | 5.50% |
| Aave V3 | Ethereum EtherFi | USDC | 6.00% | 5.50% |
| Aave V3 | Ethereum EtherFi | FRAX | 6.00% | 5.50% |
| Aave V3 | Arbitrum | DAI | 6.00% | 5.50% |
| Aave V3 | Arbitrum | USDT | 6.00% | 5.50% |
| Aave V3 | Arbitrum | LUSD | 6.00% | 5.50% |
| Aave V3 | Arbitrum | USDC | 6.00% | 5.50% |
| Aave V3 | Arbitrum | FRAX | 6.00% | 5.50% |
| Aave V3 | Optimism | DAI | 6.00% | 5.50% |
| Aave V3 | Optimism | USDT | 6.00% | 5.50% |
| Aave V3 | Optimism | sUSD | 6.00% | 5.50% |
| Aave V3 | Optimism | LUSD | 6.00% | 5.50% |
| Aave V3 | Optimism | USDC | 6.00% | 5.50% |
| Aave V3 | Base | USDC | 6.00% | 5.50% |
| Aave V3 | Base | EURC | 8.50% | 8.00% |
| Aave V3 | Metis | m.DAI | 6.00% | 5.50% |
| Aave V3 | Metis | m.USDC | 6.00% | 5.50% |
| Aave V3 | Metis | m.USDT | 6.00% | 5.50% |
| Aave V3 | Avalanche | DAI.e | 6.00% | 5.50% |
| Aave V3 | Avalanche | USDC | 6.00% | 5.50% |
| Aave V3 | Avalanche | USDt | 6.00% | 5.50% |
| Aave V3 | Avalanche | FRAX | 6.00% | 5.50% |
| Aave V3 | Avalanche | AUSD | 6.00% | 5.50% |
| Aave V3 | Gnosis | WXDAI | 6.00% | 5.50% |
| Aave V3 | Gnosis | EURe | 6.00% | 5.50% |
| Aave V3 | Gnosis | USDC.e | 6.00% | 5.50% |
| Aave V3 | BNB | USDC | 6.00% | 5.50% |
| Aave V3 | BNB | USDT | 6.00% | 5.50% |
| Aave V3 | BNB | FDUSD | 6.00% | 5.50% |
| Aave V3 | Scroll | USDC | 6.00% | 5.50% |
| Aave V3 | ZkSync | USDC | 6.00% | 5.50% |
| Aave V3 | ZkSync | USDT | 6.00% | 5.50% |
| Aave V3 | Sonic | USDC.e | 9.00% | 8.50% |
| Aave V3 | Celo | USD₮ | 7.00% | 6.50% |
| Aave V3 | Celo | USDC | 7.00% | 6.50% |
| Aave V3 | Celo | cUSD | 7.00% | 6.50% |
| Aave V3 | Celo | cEUR | 7.00% | 6.50% |
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.
Copyright
Copyright and related rights waived via CC0.