[Direct-to-AIP] Arbitrum eMode Update - rsETH and ezETH

Governance
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title: [Direc-to-AIP] Arbitrum eMode Update - rsETH and ezETH
author: @TokenLogic
created: 2025-07-29

Summary

This publication proposes updating the ezETH and rsETH eMode categories on Arbitrum.

Motivation

In preparation for the upcoming DRIPs campaign on Arbitrum, this publication proposes enabling Kelp and Renzo Liquid Restaking Tokens (LRTs) access to ETH via existing v3.2 eModes.

Upon implementing this proposal, weETH, rsETH and ezETH will each have the same LTV and LT for borrowing wstETH and ETH on Arbitrum.

Specification

Update rsETH/WETH eMode

Parameter Value Value Value
Asset rsETH wstETH wETH
Collateral Yes No No
Borrowable No Yes Yes
Max LTV 93.00% - -
Liquidation Threshold 95.00% - -
Liquidation Penalty 1.00% - -

Update ezETH/WETH eMode

Parameter Value Value Value
Asset ezETH wstETH wETH
Collateral Yes No No
Borrowable No Yes Yes
Max LTV 93.00% - -
Liquidation Threshold 95.00% - -
Liquidation Penalty 1.00% - -

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

  1. Gather feedback from the community, specifically feedback from Risk Service providers.
  2. Using the Direct-to-AIP process, submit AIP(s) for vote.

Copyright

Copyright and related rights waived via CC0.

2 Likes
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Summary

LlamaRisk supports the proposed changes. Adding WETH to rsETH and ezETH E-Modes on Arbitrum poses minimal incremental risk and provides greater flexibility for users seeking ETH liquidity against these restaking assets. While the updated E-Modes broaden utility, they do not directly enable participation in the Arbitrum DRIP, which currently requires wstETH to be supplied as collateral, though this requirement may evolve in the future.

Market Risk

rsETH E-mode
The main use case for rsETH collateral on Arbitrum currently is LST yield leverage, where wstETH is borrowed. Currently, $18.4M rsETH is supplied on Arbitrum with $15.6M worth of wstETH borrowed against it, all by a single user operating at a health factor of 1.08. This concentrated usage pattern reflects a narrow collateral utility, which the proposed inclusion of WETH borrowing in the rsETH E-Mode would expand.

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Source: rsETH/WETH Swap Liquidity, DeFiLlama, August 4, 2025

Users can currently swap 87 rsETH (worth $325K) for WETH on Arbitrum with just 1% price impact, which is relatively low considering rsETH’s current supply cap of 7.92K tokens ($30M).

ezETH E-mode

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Source: ChaosLabs, August 4, 2025

Like rsETH, ezETH on Arbitrum is primarily used for wstETH-based LST yield leverage, with approximately $1.3M worth of ezETH currently supplied. The borrowing distribution of assets against ezETH can be seen above.

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Source: ezETH/WETH Swap Liquidity, DeFiLlama, August 4, 2025

Notably, ezETH has significantly better secondary market liquidity than rsETH on Arbitrum; users can swap up to 530 ezETH (roughly $2M) for WETH with less than 1% price impact.

DRIP Farming

The Arbitrum DeFi Renaissance Incentive Program (DRIP) gives users 2% APR for supplying wstETH as collateral and borrowing ETH, USDC, or USDT on approved lending protocols. To qualify, users must maintain a minimum 15% LTV.

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image1221×386 29 KB

Source: WETH/wstETH Swap Liquidity, DeFiLlama, August 4, 2025

While the proposed rsETH or ezETH/WETH E-Modes alone do not make users eligible for DRIP rewards, since the program only incentivizes wstETH supplied as collateral, they can still be used to support DRIP participation indirectly. One option is to borrow wstETH via existing E-Modes and loop into DRIP. Alternatively, the new E-Modes allow borrowing WETH directly and swapping it for wstETH, though this is more complex and reliant on limited wstETH DEX liquidity (currently just under $5M).

Disclaimer

This review was independently prepared by LlamaRisk, a community-led decentralized organization 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.

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Summary

Chaos Labs supports updating ezETH and rsETH E-Modes on the Arbitrum Instance, additionally we recommend adjusting the wstETH/WETH E-Mode parameters to better align with current risk profiles.

LRT E-Modes Motivation

At the moment ezETH and rsETH are mostly utilized in looping strategies with wstETH. The nature of the strategy lies in the borrowing wstETH against an LRT in a recursive matter to year leveraged restaking returns.

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image2018×880 112 KB

While this strategy would, in theory, significantly drive up the supply caps of ezETH and rsETH, their stagnant supply on Aave indicates that it has been relatively ineffective in the near term. Although the chart below shows a clear increase in rsETH’s supply cap utilization over the past three months, we also see that its supply has plateaued in the last two weeks. Given the nature of the looping strategy, we can deduce that profitability has stalled due to the low net yield between restaking returns and borrowing costs.

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output (18)1779×1323 107 KB

This phenomenon is additionally illustrated by the stagnant supply of rsETH and ezETH, along with a consistent borrow level of wstETH at 4,000 tokens.

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image (1)2000×696 66.5 KB

The newly approved DRIP campaign, which will direct roughly 10M ARB in incentives toward WETH and stablecoin borrowing, offers an opportunity to revitalise demand. Incorporating WETH as a borrow asset in the existing ezETH/wstETH and rsETH/wstETH E-Modes will channel those incentives into fresh borrowing activity without displacing the current wstETH loops. This change preserves the established collateral parameters while giving users the flexibility to switch between wstETH and WETH loops as relative yields shift.

wstETH E-mode Motivation

wstETH is exposed only to Ethereum consensus-layer penalties, while LRTs such as rsETH and ezETH face additional risk of AVS slashing. Given the lower risk, wstETH can support higher LT and LTV without significantly increasing the protocol risk.

Our slashing simulations confirm: in the vast majority of validator-failure scenarios, Lido’s losses would remain below 0.10% of stake, well within the 1% liquidation penalty.

We propose creating an additional wstETH E-Mode with improved parameters of 94% Max LTV and a 96% Liquidation Threshold, while maintaining the 1% liquidation penalty. These adjustments preserve the protocol’s safety margin while ensuring that wstETH/WETH loop stays competitive with the LRT-based strategies.

Recommendation

Given the behavior of market participants and expected growth of borrowing demand for WETH market, we recommend including WETH into the E-Modes for rsETH and ezETH. Additionally, in order to align the risk profiles of LRTs and wstETH we recommend creating the wstETH/WETH E-Mode.

Specification

Update rsETH/WETH E-Mode

Parameter Value Value Value
Asset rsETH wstETH wETH
Collateral Yes No No
Borrowable No Yes Yes
Max LTV 93.00% - -
Liquidation Threshold 95.00% - -
Liquidation Penalty 1.00% - -

Update ezETH/WETH E-mode

Parameter Value Value Value
Asset ezETH wstETH wETH
Collateral Yes No No
Borrowable No Yes Yes
Max LTV 93.00% - -
Liquidation Threshold 95.00% - -
Liquidation Penalty 1.00% - -

wstETH/WETH Correlated E-Mode

Parameter Value Value
Asset wstETH wETH
Collateral Yes No
Borrowable No Yes
Max LTV 94.00% -
Liquidation Threshold 96.00% -
Liquidation Penalty 1.00% -

Disclaimer

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

Copyright

Copyright and related rights waived via CC0