Summary
A proposal to:
- Increase the supply cap of syrupUSDC on the Base Instance
- Increase the debt ceiling of XAUt on the Ethereum Core Instance
- Reduce the borrow cap of WBTC on the Ethereum Core Instance
- Reduce the Slope 1 of WBTC on the Ethereum Core 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.
syrupUSDC (Base)
Within less than 48 hours since listing syrupUSDC has reached its supply cap of 50 million tokens on the Base instance of Aave v3. The rapid saturation of the supply cap signals elevated demand to utilize syrupUSDC as collateral, indicating substantial demand to loop the asset.
Supply Distribution
The supply distribution of syrupUSDC is highly concentrated, with the top user accounting for 36% of the market. As shown in the plot below, users are utilizing the asset to recursively collateralize USDC debt to maximize net exposure to the rate differential between the underlying implied rate of syrupUSDC and USDC borrowing costs. Typical for such markets, the distribution of health factors is tightly clustered around 1.02, which, given the high correlation between the debt and collateral assets, presents minimal liquidation risk.
Liquidity
At the time of writing, syrupUSDC on-chain liquidity is sufficient to limit slippage on a 6 million token swap to conservative 20 basis points, supporting an expansion of the supply cap.
Recommendation
Given the growing market demand, the high correlation between asset prices, and favorable liquidity conditions, we recommend increasing the supply cap for syrupUSDC on the Base instance.
XAUt (Ethereum Core)
While XAUt has not reached its supply cap of 20,000 tokens, recent price growth has caused the asset’s borrowing capacity to exceed the previously introduced debt ceiling. As the debt ceiling was initially introduced to limit the protocol’s exposure to the first listed tokenized commodity, the demand and observed risk profile of the associated positions provide a basis for a moderate expansion of the debt ceiling.
Supply Distribution
The supply distribution of XAUt is highly concentrated, as the top user accounts for over 75% of the market. Given the elevated demand to collateralize stablecoin debt with XAUt and the conservative debt ceiling, the market proved competitive for users to enter, which explains the high concentration of supply. Generally, users exhibit conservative behavior patterns, as exemplified by moderately safe health factors ranging from 1.76 to 2.39, indicating minimal liquidation risk.
XAUt is used exclusively to underwrite stablecoin debt, which is facilitated by the isolated borrowing mode. The overwhelming majority of debt is concentrated in USDe, which represents 74% of all XAUt-related borrowing.
Liquidity
At the time of writing, slippage on a 1,500 XAUt token sell order is projected at 3.4%, which, given the substantial 6% liquidation bonus and conservative user behavior, supports an expansion of the debt ceiling.
Recommendation
Considering the demand to collateralize stablecoin debt with XAUt, along with favorable liquidity conditions and safe user behavior, we recommend a moderate increase in the asset’s debt ceiling on the Ethereum Core instance.
WBTC (Ethereum Core)
Demand for borrowing WBTC on the Ethereum Core instance of Aave V3 has declined substantially, as shown in the chart below. The borrow cap is currently only 5% utilized, while aggregate borrowing has fallen by approximately 70% from its all-time high. Current realized borrowing demand has stabilized at roughly 1,400 WBTC.
While overall borrowing activity has decreased materially, the share of LBTC-collateralized borrowing has remained a significant driver of demand. In particular, LBTC-backed positions now account for approximately 35% of all WBTC-related collateral posted, indicating that leveraged looping strategies continue to contribute meaningfully to the debt accumulation.
Given that LBTC is one of the primary sources of observed borrowing demand, and in light of the recently compressed yield dynamics of LBTC, we recommend reducing the target borrowing cost of WBTC to better align the interest rate curve with the effective appreciation rate of the yield-bearing collateral within these leveraged loops.
Specifically, we recommend decreasing Slope 1 for WBTC from 4.25% to 2.5%. Additionally, given the material decline in aggregate borrowing demand, we recommend reducing the borrow cap to better reflect current utilization levels and limit excess unused capacity.
Specification
| Instance | Asset | Current Supply Cap | Recommended Supply Cap |
|---|---|---|---|
| Base | syrupUSDC | 50,000,000 | 100,000,000 |
| Instance | Asset | Current Debt Ceiling ($) | Recommended Debt Ceiling ($) |
|---|---|---|---|
| Ethereum Core | XAUt | 25,000,000 | 30,000,000 |
| Instance | Asset | Curren Slope 1 | Recommended Slope 1 | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum Core | WBTC | 4.25% | 2.5% | 28,000 | 4,000 |
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.