Overview
Chaos Labs supports listing wrsETH on Aave V3’s Plasma instance. Below, we present our analysis and initial risk parameter recommendation.
Motivation
Inclusion of Kelp DAO’s wrsETH as a collateral asset on Plasma will increase the utility of the instance. The asset has already been onboarded on multiple other Aave V3 instances, including, but not limited to, Arbitrum, Base, and Linea.
Asset Overview
wrsETH is the wrapped representation of rsETH and is made available on Plasma via LayerZero’s OFT standard. This approach introduces minimal incremental risk to the protocol, as the majority of Plasma assets rely on the same bridging mechanism.
Economically, wrsETH represents a claim on underlying rsETH, backed by native-staked ETH and select LSTs(e.g., wstETH), and restaked via Kelp DAO to secure additional services. Holders accrue the combined staking and restaking yields (net of protocol fees) through an appreciating exchange rate, while the wrapped format provides a non-rebasing ERC-20 suitable for DeFi collateral and integrations.
As mentioned previously, the asset is widely used on other Aave instances, primarily in leveraged restaking strategies, where users collateralize WETH or wstETH debt with wrsETH and earn a spread between the underlying yield of wrsETH and the borrow rates of the debt assets.
Plasma Market
The Plasma instance has experienced substantial growth, surpassing $6 billion in total value locked since launch, driven by incentive programs and favorable market dynamics. Introducing wrsETH is expected to enhance the instance’s utility and facilitate growth by enabling additional leveraged strategies, including those based on liquid restaking tokens.
Given the strong demand to borrow USDT against weETH in the instance, coordinated by the Plasma team, coupled with the limited WETH/USDT DEX liquidity on the market, which both assets require routing through during liquidations, has led to a constraint on WETH supply caps.
Consequently, the current WETH supply is relatively small and will likely constrain growth across other LST/LRT markets—wstETH, weETH, and wrsETH—as their looping strategies ultimately compete for a limited WETH borrowing pie.
Given these market dynamics, aggregate LST/LRT demand (e.g., wstETH, weETH, wrsETH) will likely exceed WETH borrowing capacity. To distribute looping demand more evenly and support orderly growth of both the asset and the instance, we suggest introducing an E-Mode for wrsETH / wstETH (mirroring the Core configuration). This would aid in diversifying looping strategies rather than concentrating them around limited WETH capacity.
Liquidity
At the time of writing, Plasma has one significant wrsETH / WETH pool with a net TVL of $6.5 million.
LTV, Liquidation Threshold, and Liquidation Bonus
We recommend setting the asset’s non-E-Mode LTV and LT to 0.05% and 0.10%, respectively, aligning the values with those in the Arbitrum and Base instances. This will prioritize leveraged strategies while limiting uncorrelated borrowing that could exhaust on-chain liquidity in the event of large-scale liquidations.
E-Modes
We recommend introducing a wstETH/WETH E-Mode, which reflects the ETH Correlated E-Mode risk parameters on the Ethereum Core instance. The E-Mode will allow to facilitate wrsETH / WETH looping where users earn leveraged spread between the underlying yield of wrsETH against WETH borrow rate. The configurations aim to increase the utility of both the asset and the instance as a whole by allowing users to deploy wstETH into a set of strategies, incentivizing additional borrowing demand.
We recommend against the introduction of a wrsETH/USDT E-Mode at this time. Plasma’s WETH/USDT DEX liquidity is currently limited, and given the lack of wrsETH/USDT DEX liquidity, any wrsETH liquidation derived from this suggested E-Mode would route via wrsETH/WETH → WETH/USDT, requiring sufficient WETH/USDT liquidity to be performed profitably. Additionally, as wrsETH and other ETH-related assets maintain a high price correlation, a sudden price movement in the collateral value would trigger liquidation from multiple ETH-correlated assets, putting additional strain on the limited WETH/USDT DEX liquidity on the market. This could cause a significant price impact and increase the liquidation risk of related positions.
Chaos Labs will continue to monitor the market and will reconsider the introduction of a wrsETH/USDT E-mode once the DEX liquidity on the route from wrsETH collateral to USDT debt improves meaningfully.
Pricing
We recommend pricing wrsETH using a combination of a wrsETH/ETH exchange rate feed and the ETH/USD price feed to derive the USD price for wrsETH.
Recommendation
Chaos Labs supports the proposal to list wrsETH on the Plasma instance. The listing will increase the instance’s utility and incentivize additional activity that will support further growth and increase the protocol’s revenue. We recommend effectively isolating the asset’s utility wrsETH/WETH E-Mode in order to reduce the volatility exposure and liquidity risks. Additionally, we have observed that WETH liquidity on Aave is currently a limiting factor for the asset’s future growth; hence, we suggest adding a wrsETH/wstETH E-Mode to allow for additional usage in cases of high competition in the WETH market.
Specification
Following the above analysis, we recommend the following parameter settings:
wrsETH Market Configuration (Plasma Instance)
| Parameter | Value |
|---|---|
| Asset | wrsETH |
| Isolation Mode | No |
| Borrowable | No |
| Collateral Enabled | Yes |
| Supply Cap | 20,000 |
| Borrow Cap | - |
| Debt Ceiling | - |
| LTV | 0.05% |
| LT | 0.10% |
| Liquidation Penalty | 7.0% |
| 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 | see below |
wrsETH/WETH E-Mode
| Parameter | wrsETH | WETH | wstETH |
|---|---|---|---|
| Collateral | Yes | No | No |
| Borrowable | No | Yes | Yes |
| Max LTV | 93% | - | - |
| Liquidation Threshold | 95% | - | - |
| Liquidation Bonus | 1.0% | - | - |
CAPO
| maxYearlyRatioGrowthPercent | ratioReferenceTime | MINIMUM_SNAPSHOT_DELAY |
|---|---|---|
| 9.83% | monthly | 14 days |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
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