[Risk Stewards] - Reduce wstETH Borrow Rate

[TokenLogic]

[Risk Stewards] - Reduce wstETH Borrow Rate

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title: [Risk Stewards] - Reduce wstETH Borrow Rate
author: @TokenLogic
created: 2024-02-26

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Summary

This publication proposes reducing the wstETH Slope1 parameter across Prime, Core, Arbitrum and Base instances of Aave v3 via the Risk Steward.

Motivation

The previous change to wstETH Borrow Rate led to over 60k wstETH being borrowed within a few days of AIP-244 being implemented (shown by the rapid increase below). Since the 13th February, wstETH debt growth has stagnated, whilst wstETH deposits grew by 17.7k in response to the deposit native yield.

Utilisation of the wstETH Reserve on Prime continues to trend sideways whilst the LRT/LST yield maximising strategies APR drift lower with a declining EIGEN spot price.

To partially mitigate the affects of falling LRT yields, this publication proposes reducing the wstETH Borrow Rate. Reducing the Borrow Rate will further encourage users to take advantage of the rewards provided by Renzo and Kelp whilst also acting to preserve Aave’s AUM at a time when the return from the yield maximising LRT/LST has been contracting.

Given the Risk Steward can reduce the Borrow Rate parameters by 0.50% every 3 days, this publication proposes a modest Slope1 reduction:

• 20bps on Prime, Arbitrum and Base instances; and,
• 15bps on Core instance.

The 15bps reduction on Core is reflective of the lower utilisation due to significantly higher wstETH deposit AUM relative to the other instances of Aave Protocol’s with dedicated LRT/LST eMode categories.

Specification

The below borrow rate changes are proposed on Prime, Arbitrum and Base instances of Aave v3.

Parameter	Current	Proposed
Base	0.00%	0.00%
Slope1	0.75%	0.55%
Slope2	85.0%	85.0%

The below borrow rate changes are proposed on Core instance of Aave v3.

Parameter	Current	Proposed
Base	0.00%	0.00%
Slope1	1.75%	1.60%
Slope2	85.0%	85.0%

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

1. Gather feedback from the community.
2. Implement amendments via Risk Steward role.

Copyright

Copyright and related rights waived via CC0.

[sid_areta]

This proposal makes sense to us and is in line with market conditions - ensuring utilisation increases is necessary especially with lower yield on LRTs.

What is the expected utilisation with these updates?

[Kene_StableLab]

We support this proposal, it is important to maintain a healthy balance between deposits and borrowing in order to create value for Aave and give users opportunities for better capital efficiency.

[ChaosLabs]

Overview

Chaos Labs supports the proposed reduction in wstETH’s Slope1 parameter across the mentioned deployments of Aave V3 through Risk Stewards.

Motivation

While the borrowing demand for wstETH has decreased on the Prime instance, as the ezETH implied rate has decreased over the last months following a reduction in EIGEN token price, the rsETH implied rate has grown over the same time, and as such, the demand on the Core instance has remained stable.

However, we find that the proposed change may help boost the utilization of wstETH. The Prime market has consistently been closest to its target rate, while the Core market has lagged by about 1.2% in recent days. As such, we recommend decreasing both the Prime and Core instances by 15 bps. We do not recommend a larger decrease on Prime because the market is already highly utilized.

The changes will also not meaningfully increase risk because UOptimal and Slope2 will remain untouched, ensuring that the market does not become over-utilized. We will implement these updates using the Risk Steward.

Specifications

Market	Current Slope 1	Recommended Slope 1	Slope 1 Change
Arbitrum	0.75%	0.55%	-0.20%
Base	0.75%	0.55%	-0.20%
Ethereum Prime	0.75%	0.55%	-0.15%
Ethereum Core	1.75%	1.60%	-0.15%

Disclaimer

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

Copyright

Copyright and related rights waived via CC0