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

[ACI]

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

Author: ACI

Date: 2025-05-26

2025-06-04 The current proposal has been updated with Risk Services Providers analysis.

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Summary

This proposal seeks to onboard rsETH to the Aave V3 deployment on the Linea network.

As the onboarding of rsETH has already been approved and executed on the Ethereum, Arbitrum, and Base Aave V3 instances, this proposal follows the Direct-to-AIP path to extend rsETH support to the Linea instance without repeating the full ARFC process.

Motivation

rsETH is a liquid staking token issued by Kelp DAO, offering users access to rewards from ETH staking while maintaining liquidity and DeFi composability. Its integrations on Aave across other networks have proven successful in terms of risk profile and utility.

Given that:

• rsETH has already passed governance and risk assessments for Ethereum, Arbitrum, and Base,
• Linea is a supported Aave V3 deployment with growing activity and integration potential,
• A precedent has been set for using the Direct-to-AIP path when onboarding previously approved assets to new instances,

This proposal aims to onboard rsETH to Linea V3 under the same configuration parameters used for other L2s, adjusted for market conditions where appropriate.

Specification

2025-06-04 The current proposal has been updated with Risk Services Providers analysis.

wrsETH Market Configuration (Linea Instance)

Parameter	Value
Asset	wrsETH
Isolation Mode	No
Borrowable	No
Collateral Enabled	Yes
Supply Cap	400
Borrow Cap	-
Debt Ceiling	-
LTV	70%
LT	73%
Liquidation Penalty	10%
Liquidation Protocol Fee	10.00%
Variable Base	-
Variable Slope1	-
Variable Slope2	-
Uoptimal	-
Reserve Factor	-
Stable Borrowing	Disabled
Flashloanable	Yes
Siloed Borrowing	No
Borrowable in Isolation	No
E-Mode Category	wrsETH/WETH

wrsETH/WETH Isolated Liquid Liquid E-mode Configuration

Parameter	Value	Value
Asset	wrsETH	WETH
Collateral	Yes	No
Borrowable	No	Yes
Max LTV	90%	-
Liquidation Threshold	93%	-
Liquidation Bonus	1.0%	-

Useful Links

• [ARFC] Add rsETH to Aave V3 Ethereum
• [ARFC] Onboard rsETH to Ethereum and Arbitrum and Base V3 Instances
• 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 under CC0

[LlamaRisk]

LlamaRisk recommends onboarding wrsETH to the Linea network with an initially capped supply and a more efficient rsETH Correlated E-Mode. Any future increases in supply will depend on growing demand or an improvement in the network’s currently limited DEX liquidity, currently standing around $500k.

Key risks include liquidity risk, bridge risk and pricing risk. These risks can be priced in with careful parameterization and utilizing CAPO to help prevent against donation attack. LlamaRisk has previously reviewed this asset, where we noted a high level of dependency risk stemming from fixed contract exchange rates and significant offchain dependencies.

One notable recent incident for rsETH was an infinite mint glitch, which has since been addressed by Kelp’s team through the addition of Proof of Reserves. It is an important step to improve protocol’s security, which is a notable dependency risk that Aave assumes.

The exact deployment parameters will be presented jointly with Chaos Labs, which will follow up on this thread shortly.

rsETH on Linea

rsETH on Linea is an OFT, meaning it is bridged with LayerZero. Some 1691 rsETH have been bridged over thus far, with 98% being held in the wrapper contract. OFTs are widely used on Aave at this time, so little incremental architectural risk is presented by the asset or its used bridging solution.

Source: rsETHWrapper holders, Lineascan 29 May, 2025

This contract was deployed on Linea on the April 15th, 2024 by Kelp DAO deployer address. As this asset must be non-rebasing for compatibility, Aave will be onboarding the wrapped counterpart, wrsETH. This asset is held largely by lending markets (ZeroLend, Mendi, Layerbank), who are using it to power leveraged staking.

Liquidity

Liquidity for the asset on this network is limited. This presents profitable liquidation risk if more aggressive supply caps were to be set.

Source: wrsETH to wETH Linea, Odos, May 30, 2025

Users may currently exchange ±150 rsETH at 7.5% price impact. The majority of this trade is facilitated on Nile V2, which is a concentrated liquidity DEX, meaning should the price of rsETH deviate substantially from WETH, liquidity may not be provided, further exacerbating this problem. While rsETH is pegged to ETH’s price, the loose nature of the peg may result in short term liquidation complexity.

Liquidity in large rsETH Nile pools is relatively concentrated, with 7 LPs providing >50% of the liquidity. This concentration compounds liquidity risk. For the time being, lenders on Linea would be best served with tight parameterization.

With this in mind, this liquidity is representative of the more nascent state of this network and could improve further as Linea continues to develop. It should also be noted that asset’s deployment on Aave could bring additional demand and, therefore, facilitate rsETH’s supply growth on Linea.

Ownership

The rsETH OFT is owned by a 3/6 Safe. This address may perform a variety of OFT-related upgrades, transfer ownership or burn ownership. This upgradeability presents risk which is compounded by multisig control.

Price Feed

On this network, rsETH currently relies on a Chainlink market price feed with a 0.5% deviation threshold and a 24 hour heartbeat. This price feed presents risk due to low available onchain liquidity and would not be used to price the asset.

Instead, as with many LSTs and LRTs on Aave, rsETH should be valued using its internal rsETH/ETH exchange rate together with an ETH/USD market feed, protected by CAPO. Since L2s do not support an onchain rsETH exchange rate function, Chainlink will need to deploy an internal exchange rate feed before rsETH would be onboarded.

Parameter Recommendations

It is recommended that rsETH would be deployed as a non-borrowable asset, together with a more efficient rsETH Correlated E-Mode. The risk parameters of this setup will be presented jointly with @ChaosLabs

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.

[EzR3aL]

Hello,

for the moment I do not support this asset listing as the numbers simply are too small to be profitable for the DAO after considering the overall fairly small borrow demand on the Linea market. The risk added, extra work and maintenance will be much more.
We should revisit this proposal when this asset has at least an onchain market cap of 50-100m.

[AMD18]

rsTH by Kelp is a very successful asset. I agree with @EzR3aL that the mcap on Linea should be bigger. But, feels to me like a chicken-egg issue.

[ChaosLabs]

Overview

Chaos Labs supports the listing of rsETH on the Aave V3 Linea instance, as rsETH has already passed governance and risk assessments on Ethereum, Arbitrum, and Base. Additionally, its liquidity on Linea is sufficient to support a listing. On Linea, rsETH is transferred via the OFT standard, and wrsETH is a wrapped version of the OFT-based rsETH. Below, we present wrsETH’s market data on Linea and outline our proposed initial risk parameters.

Market Cap & Liquidity

wrsETH’s total supply on Linea has gradually declined over the past six months, dropping from a peak of 48K to around 1.68K currently. Following this decrease, the current supply translates to a market cap of $4.65M. While this market cap is limited, we expect the supply of the asset to grow following the onboarding on Aave, thanks to its improved utility on the chain.

wrsETH’s DEX liquidity on Linea is primarily concentrated in two pools: the wrsETH/ETH pool on Nile, which holds a TVL of $331K, and the ETH/wrsETH pool on SyncSwap, with a TVL of $252K. Below, we present the aggregated wrsETH liquidity on Linea over time.

Volatility

In the wrsETH/WETH liquidity pool on Nile, wrsETH has generally maintained a stable peg relative to ETH. While there have been two instances where the price deviation exceeded 100bps, each fluctuation quickly reverted back to normal levels.

E-Mode

We recommend enabling an wrsETH/WETH E-mode to facilitate potential looping strategies, which may in turn drive greater user adoption.

LTV, Liquidation Threshold, and Liquidation Bonus

Although wrsETH’s current supply is sufficient to support listing, its steadily declining supply and liquidity, especially over the past 180 days, raise some concerns. Given these factors, we recommend assigning wrsETH a conservative initial set of risk parameters, setting the LTV at 70% and the LT at 73%.

Supply Cap and Borrow Cap

We recommend setting the wrsETH supply cap based on Chaos Labs’ standard methodology, which defines the cap as twice the liquidity available under the liquidation bonus. Based on this approach, we propose an initial supply cap of 300.

Given wrsETH’s yield-bearing nature and the historically limited use cases for borrowing yield-bearing assets, we recommend setting wrsETH as non-borrowable at this time.

Oracle

We recommend using the wrsETH/ETH exchange rate, which can be obtained either through the LayerZero bridged oracle feed or through the Chainlink wrsETH/ETH feed, which appears to have been mislabeled as wrsETH/rsETH, along with the ETH/USD Chainlink price feed to derive the USD price for rsETH.

Specification

Following the above analysis, we recommend the following parameter settings:

wrsETH Market Configuration (Linea Instance)

Parameter	Value
Asset	wrsETH
Isolation Mode	No
Borrowable	No
Collateral Enabled	Yes
Supply Cap	400
Borrow Cap	-
Debt Ceiling	-
LTV	70%
LT	73%
Liquidation Penalty	10%
Liquidation Protocol Fee	10.00%
Variable Base	-
Variable Slope1	-
Variable Slope2	-
Uoptimal	-
Reserve Factor	-
Stable Borrowing	Disabled
Flashloanable	Yes
Siloed Borrowing	No
Borrowable in Isolation	No
E-Mode Category	wrsETH/WETH

wrsETH/WETH Isolated Liquid Liquid E-mode Configuration

Parameter	Value	Value
Asset	wrsETH	WETH
Collateral	Yes	No
Borrowable	No	Yes
Max LTV	90%	-
Liquidation Threshold	93%	-
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