[Direct to AIP] Add WETH to the rsETH LST E-Mode on Aave Core Instance

[ACI]

[Direct to AIP] Add WETH to the rsETH LST E-Mode on Aave Core Instance

Author: @ACI

Date: 17/11/2025

Summary

This proposal seeks to extend utility for rsETH on the Aave V3 Core market by adding WETH debt to the current rsETH/LST E-Mode category.

Motivation

The Aave Core market has recently experienced significant ETH inflows, increasing the available supply and lowering utilization. Maintaining a healthy utilization rate on WETH is crucial for protocol revenue and lender incentives.

rsETH is a liquid staking token issued by Kelp, already proven across Aave deployments as a robust collateral asset. Currently, rsETH suppliers on the Core instance can only borrow stablecoins and access the LST E-Mode, which limits their leverage strategies.

By adding WETH to the rsETH/LST E-Mode, the protocol unlocks classical rsETH/WETH yield maximising loops, historically one of the largest sources of borrowing demand on Aave.

Given the strong demand on the sidelines and proven growth potential of Kelp’s LRT ecosystem, we expect up to $1B in rsETH inflows, absorbing idle ETH liquidity on the Core market and restoring optimal utilization.

Specification

We propose the following parameters to be confirmed by Risk Service Providers following their review.

General Parameters

Parameter	Value
Asset	rsETH
Isolation Mode	No
Borrowable	Yes
Collateral Enabled	Yes
Supply Cap	Unchanged
Borrow Cap	Unchanged
Debt Ceiling	-
LTV	0.05%
LT	0.10%
Liquidation Penalty	7.0%
Liquidation Protocol Fee	10.00%
Flashloanable	Yes
Siloed Borrowing	No
Borrowable in Isolation	No
E-Mode	New rsETH/ETH category

rsETH/LST E-Mode Parameters Update

Parameter	rsETH	WETH	LST
Collateral	Yes	No	No
Borrowable	No	Yes	Yes
Max LTV	93%	-	-
LT	95%	-	-
LB	1.0%	-	-

These parameters are aligned with the others ETH-correlated E-Mode used on Core Market.

Useful Links

[ARFC] Add rsETH to Aave V3 Ethereum

[Direct to AIP] Onboard rsETH to Aave V3 Avalanche Instance

rsETH Documentation: https://docs.kelpdao.xyz/

Disclaimer

This proposal is powered by Skywards. The Aave Chan Initiative is not directly affiliated with Kelp DAO and did not receive compensation for creation of this proposal.

Next Steps

1. Publication of the proposal (current stage) collect community & service providers feedback.
2. Publish an AIP vote for final confirmation and enforcement of the proposal.

Copyright

Copyright and related rights waived via CC0.

[LlamaRisk]

Summary

Llamarisk supports the proposal to add WETH to the rsETH LST E-Mode on the Core instance. Given the correlation between the two assets, the available borrow capacity and protocol revenue opportunity, this proposal aligns with established WETH/rsETH E-mode configurations. Minimal incremental risk has been identified; therefore, it would be sensible and beneficial for Aave to implement.

Rationale

The addition of WETH to the liquid restaking token’s LST E-mode would expand its supported assets, representing an established rsETH/WETH E-Mode configuration seen on other instances, including Arbitrum, Linea, and Plasma. rsETH, which is backed by ETHx, stETH, and ETH, currently has a supply cap utilization of ~33.7% on the Core instance (~$494M of a $1.47B supply cap). The E-mode could expand the supply of rsETH by encouraging LPs to deposit and directly engage in LRT/WETH looping, offering them another strategy on Core to generate higher yields.

WETH’s borrow cap utilization at the time of writing stands at 71% (~$2.4B), representing significant underutilized capacity that, with its addition to the rsETH LST E-Mode, would benefit the protocol by increasing revenue from the WETH pool as utilization rises. Particular risk considerations would be akin to those observed in existing rsETH E-modes on other instances.

Source: rsETH/WETH Swap Liquidity, DeFiLlama, November 21st, 2025

Approximately 3088 rsETH (~$8.9M) can be swapped for WETH within a 1% price impact.

Mainnet rsETH liquidity is concentrated in 3 pools, with 2 pools representing the majority of the available supply:

• Uniswap rsETH/wstETH: has a TVL of $9.6M (1,067 rsETH, ~$3.13M), with 4 LPs supplying the pool.
• Fluid rsETH/WETH: has a TVL of $6.1M (1,240 rsETH, ~$3.64M), with 38 LPs supplying the pool (mainly centered around 12 addresses).
• Balancer rsETH/hgETH: has a TVL of $194.4K (30 rsETH, ~$91.34K), with 2 holders accounting for the majority of the liquidity.

E-Mode Parameters

We support the proposed parameters, as they align with the existing rsETH E-Mode parameters on instances highlighted above.

Disclaimer

This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.

[TokenLogic]

Thank you, @ACI, for presenting this proposal. From a revenue-generating perspective, we support creating additional demand for ETH debt and reducing the wETH Borrow Rate by 10bps to encourage high utilisation of the ETH reserve.

The chart below shows the utilisation of the wETH Reserve during Q4 2025. Whilst both wETH deposits and Debt are at all-time highs, utilisation has been materially lower since the 10th November, as user deposits have exceeded the rate at which new debt has emerged.

Reference: Aave Analytics | TokenLogic

Reference: Aave Analytics | TokenLogic

Reference: Aave Analytics | TokenLogic

With the Lido Index Rate returning 2.5% APR and Slope1 configured at 2.5% APR, at high utilisation levels, the LST yield-maximising strategy is expected to generate insufficient returns to support the additional risk introduced by a leverage position. Because of this, we propose reducing the Slope1 parameter on the Core instance.

Upon introducing additional demand for ETH debt, we anticipate the utilisation to remain within a range of 1-2% beneath the Uoptimal (Example: Min 90%, Max 91%). This provides a liquidity buffer for leveraged users and helps preserve the economics of yield-maximising strategies.

Ensuring the wstETH yield maximising strategy is preserved, 5.30% APY post fees on the Veda vault endorsed by Lido, we propose reducing the borrow rate to 2.35% on the Core instance, which is expected to generate an APR of 5.68%, before fees at 90% utilisation and a health factor of 1.01.

An additional 38k ETH pre-leverage ($114.64M USD), when deployed at a leverage ratio of x16.83 (health factor 1.01), is expected to result in 90% utilisation on the Core instance and $1.93B in user deposits.

Using the current borrow rate configuration, the opportunity cost of low ETH utilisation (72.61% relative to 90.00%) is estimated at 10.79M USD in ETH ($3,017/ETH) over a 1-year period. At 92% utilisation, Uoptimal’s annualised opportunity cost at the current ETH price is estimated at 12.18M USD on the Core instance.

Reducing the Slope1 by 15 bps to 2.35% and assuming a utilisation of 90.00%, the expected revenue upside is $8.92M for the Core instance. We propose reducing the wETH Slope1 on the Core instance, which will trigger an update to the Risk Oracle on the Prime instance. Upon observing how the market reacts, we adjust the wETH borrow rate on other networks if there is any migration to the Core instance.

[ChaosLabs]

Overview

We support the addition of ETH as a borrowable asset within the rsETH LST main E-Mode on the Ethereum Core instance.

A comprehensive technical assessment of rsETH was conducted recently in the context of making ETH borrowable in the rsETH E-Mode on the Base instance. That analysis covered rsETH’s technical architecture, redemption mechanics, backing composition, node operator distribution, and execution and consensus client diversity in detail. For completeness and transparency, we explicitly reference that work here and treat it as the primary source for general technical characteristics of rsETH.

Accordingly, this analysis does not repeat those sections in depth. Instead, it focuses on Ethereum specific considerations that are most relevant for enabling ETH borrowing within the rsETH LST main E-Mode, with particular emphasis on on-chain liquidity conditions and peg behavior as observed on Ethereum.

While changes to the WETH IR Curve on the Ethereum Core Instance have been proposed in this thread, in order to limit the scope of the voting, those changes will be covered in a separate analysis focused on their implementation via the Risk Steward and their feasibility within the current market environment.

Liquidity

Onchain liquidity for rsETH is primarily concentrated in trading pairs against ETH and wstETH, which facilitate the majority of swap activity. While pools against other liquid restaking tokens such as weETH existed earlier, they currently hold negligible liquidity.

Over the past year, rsETH’s liquidity profile has remained relatively stable in proportional terms. Onchain liquidity has consistently represented approximately 2% of total market size, sustained despite fluctuations in token supply and broader market conditions. As of the latest data, $20 million is available across DEX pools, enabling swaps of up to 4,000 rsETH ($13.5 million) to ETH under 5% price impact.

Peg Performance

Over the past year, rsETH has demonstrated stable peg performance, consistently maintaining a tight trading range relative to its intended parity with ETH. This price stability reflects a combination of timely redemption processing, sufficient onchain liquidity and effective protocol mechanisms for managing inflows and outflows across its hybrid backing structure.

In secondary markets, rsETH typically trades at a slight discount, with a median deviation of approximately 0.1% below parity. The most pronounced depeg event in the past 12 months reached a maximum of 0.4%, but this dislocation was short lived and quickly reverted.

Recommendation

We support enabling ETH as a borrowable asset within the rsETH LST main E Mode on the Ethereum Core instance of Aave v3. In our assessment, this configuration introduces limited incremental risk to the protocol and is consistent with the conclusions reached in the prior rsETH E Mode analysis conducted for the Aave v3 Base instance.

In summary, rsETH exhibits several structural properties that support ETH borrowability within an E-Mode configuration:

First, rsETH’s diversified backing across natively staked ETH and multiple LST improves redemption efficiency by providing multiple unwind paths, reducing reliance on a single asset or exit mechanism.

Second, this backing diversity increases resilience to consensus layer client related penalties, as exposure is distributed across uncorrelated node operator sets.

Third, rsETH benefits from a reasonably diverse execution and consensus client distribution across its node operator set. While operator concentration remains an area for improvement, particularly due to a relatively high reliance on P2P as both a Lido operator and a major native staking operator for Kelp, this does not materially alter the current risk assessment. Continued progress on operator diversification would further strengthen the protocol’s resilience over time.

Finally, rsETH has demonstrated strong redemption performance supported by prudent liquidity and buffer management. These mechanisms have contributed to stable peg behavior, with observed price dislocations remaining within approximately 0.4% over the past 12 months. The recent introduction of instant withdrawals, subject to available liquidity and a flat fee, is expected to further improve redemption efficiency and reinforce peg stability.

Taken together, these factors support enabling ETH borrowing within the rsETH LST main E-Mode on Ethereum.

Specification

E-mode (rsETH LST Main) - Core

Parameter	Value	Value	Value	Value
Asset	rsETH	wstETH	ETHx	ETH
Collateral	Yes	No	No	No
Borrowable	No	Yes	Yes	Yes
Max LTV	93.0%	-	-	-
Liquidation Threshold	95.0%	-	-	-
Liquidation Bonus	1.0%	-	-	-

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this recommendation.

Copyright

Copyright and related rights waived via CC0