Overview
Chaos Labs recommends decreasing the Slope 2 parameter of USDG on the Ethereum Core instance in light of the recently observed market dynamics.
Motivation
USDG on the Ethereum Core instance has experienced sustained elevated utilization, recently peaking at 88%. The dynamic was driven by a substantial supply-side shock: as the supplier base was relatively concentrated, the withdrawal of a large contributor to the reserve pool caused a sharp drop in total supply. Borrow demand, represented by two large borrowers, proved sticky and did not unwind in response, resulting in utilization remaining well above the optimal threshold even as supply partially recovered.
While supply has been rebounding since the shock, utilization still remains above optimal, resulting in highly elevated borrow rates due to the sharp configuration of the Slope 2 parameter. Sustained elevated borrowing costs incentivize further deposits, which, given the relatively small size of USDG and the concentration of borrow demand, will likely result in lower supply rates and protocol earnings going forward.
Recommendation
Two stabilizing measures are available to address the outlined market conditions. Increasing UOptimal would lower rates at current utilization but raises the risk of a liquidity crunch, as USDG’s supply is highly concentrated on Aave v3 Ethereum Core instance. Decreasing Slope 2, on the other hand, reduces effective borrowing costs for sticky borrowers without extending the optimal utilization boundary, temporarily dampening the incentive to unwind while allowing the supply base to stabilize.
Given the concentrated borrower base and the liquidity risk associated with a higher UOptimal value, we recommend decreasing Slope 2 from 50% to 30%. This calibration meaningfully reduces borrow rates in the current regime while preserving the structural incentive to revert to optimal utilization.
Specification
| Instance | Asset | Current Slope 2 | Recommended Slope 2 |
|---|---|---|---|
| Ethereum Core | USDG | 50% | 30% |
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.