[Risk Stewards] WETH Borrow Rate Update

[TokenLogic]

title: [Risk Stewards] WETH Borrow Rate Update
author: @TokenLogic
created: 2025-09-14

---

Summary

In light of recent market developments, TokenLogic recommends decreasing the slope1 parameter for wETH.

Motivation

The introduction of incentives on Linea has driven over 200k WETH in new supply, while the wstETH index rate has fallen below 2.70%. Together, these dynamics have reduced the utilization of WETH reserves across the main Aave v3 markets. Whilst the Risk Oracle on Prime has followed the broader market lower, even on this instance of Aave v3, WETH utilisation has decreased and reflects the broader impact of a compression in LST index rate and ETH borrow costs.

Whilst demand from LRTs and LST yield maximising strategies remains robust, evident by the growth on Linea, the underlying yield source has moved lower and the WETH borrow rate is now elevated relative to the broader market (Ref. Spark Protocol).

Based upon how Aave Protocol is currently configured, with a utilisation at, or close to, Uoptimal the leverage LST collateral and WETH debt strategy generates a negative return. To preserve this use case, the WETH Borrow Rate at the Uoptimal should ideally remain above the LT Index Rate.

With the goal of increasing the utilisation of WETH and growing user deposits, this publication proposes reducing the WETH Slope1 parameter and reducing the WETH borrow rate encouraging users borrowing ETH. With over $900M of WETH available to be borrowed without exceeding the Uoptimal on the Ethereum Core instance and over $40M on Base, the TVL upside from stronger utilisation is meaningful.

The Slope1 adjustment is to be executed through the Risk Steward process where practical and if needed, an AIP will be submitted to update the remaining parameters.

Specification

The following is to be implemented by the Risk Steward where practical to do so:

Market	Current Value	Proposed Value
Ethereum Core	2.70%	2.50%
Arbitrum	2.70%	2.50%
Base	2.70%	2.50%
Linea	2.70%	2.50%
Optimism	2.70%	2.50%

Disclosure

TokenLogic does not receive any payment for this proposal.

Next Steps

1. Risk Stewards to implement these updates where practical.
2. Using the Direct-to-AIP process, submit AIP(s) for vote.

Copyright

Copyright and related rights waived via CC0.

[ChaosLabs]

Overview

This analysis supports the proposal to decrease the WETH slope1 parameter across major Aave v3 markets. We recommend an initial reduction from 2.7% to 2.6%, followed by a period of observation before a further decrease is considered. While the recent market environment justifies a moderate adjustment, several near-term factors call for a phased approach to avoid an abrupt surge in leveraged staking strategies and potential instability in WETH markets.

Motivation

Decreased WETH Utilization

WETH market utilization across most major Aave v3 deployments has trended lower in recent weeks, indicating a broad softening in borrowing demand despite stable supply growth. Arbitrum is a notable exception, where utilization has historically remained elevated around 90–92%. This higher utilization is driven largely by the ongoing distribution of ARB rewards, which lowers the effective borrow APR for ETH and sustains demand. Reducing slope1 to 2.6% offers a balanced incentive to stimulate borrowing and restore healthier utilization on markets where demand has eased, while still avoiding the risk of an abrupt surge in leveraged activity.

Record High Withdrawal Queue in the Ethereum Consensus Layer

Ethereum currently faces a withdrawal queue of roughly 45 days, driven primarily by Kiln’s decision to exit and restructure its validator setup. Kiln is withdrawing approximately 1.6 million ETH, and as these validators exit, the expected staking APR for the remaining validators is likely to gradually increase by 6–7 basis points until start activating back new validators.

The timing of Kiln’s redeployment is uncertain. Even once Kiln resolves its security checks and begins staking again immediately, the deposit churn limit of 256 ETH per epoch implies that fully redepositing 1.6 million ETH would take around 30 days. Considering that the average deposit queue has been roughly 10 days over the past month, the total time for Kiln to reactivate its validators and for all of this ETH to resume earning rewards is likely to extend to 35–45 days.

ETH waiting in the deposit queue does not earn rewards, which may keep staking APR elevated for an extended period, spanning both the time required for Kiln to resume deposits and the subsequent period for the deposit queue to clear.

This elevated APR environment could increase the attractiveness of leveraged staking strategies and amplify demand for ETH borrowing on Aave if rates are lowered too aggressively.

LST and LRT Depegs and Leveraged Staking Dynamics

Heightened withdrawal queues have already contributed to temporary depegs in LSTs and LRTs since early July, creating profitable opportunities for new leveraged staking positions. A large, immediate reduction in slope1, such as a direct 0.2% cut, could make these strategies profitable even at slope2 rates. This would likely attract significant leveraged borrowing, driving a rapid increase in utilization and causing volatility in interest rates.

Recommendation

We recommend a phased reduction of WETH slope1 rather than a direct 0.2% cut, with the first step being to lower slope1 from 2.7% to 2.6% across the targeted Aave v3 markets.
However, given significant competition on the Base instance, we support the proposed Slope 1 change to 2.5%.

Following this change, utilization rates, staking APR trends, and LST or LRT market behavior should be carefully monitored over the coming weeks. Observing how the market responds will provide clarity on whether the initial adjustment is sufficient to restore healthy borrowing activity.

Specifications

Market	Current Slope 1	Recommended Slope 1
Ethereum Core	2.70%	2.60%
Base	2.70%	2.50%
Linea	2.70%	2.60%
Optimism	2.70%	2.60%
Arbitrum	2.70%	2.60%

Disclosure

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

Copyright

Copyright and related rights waived via CC0.

[LlamaRisk]

Summary

We support a phased reduction of the WETH Slope1 parameter and align with the cautious approach recommended by @ChaosLabs. Maintaining a robust liquidity buffer is important to ensure WETH withdraws can be processed without users looping Liquid Staking Tokens and Liquid Restaking Tokens needing to unwind their positions, given the current dynamics surrounding LSTs and LRTs.

The Need for a Liquidity Buffer

The Aave WETH market is integral to the health of the broader DeFi ecosystem, particularly for users employing leveraged staking strategies with LSTs and LRTs. Recent market conditions have seen many of these tokens trading slightly below their peg.

Source: Geckoterminal, 16th September 2025.

This slight de-peg, combined with extended withdrawal queues on the consensus layer, highlights the need for a substantial liquidity buffer within Aave. This buffer is crucial as it allows LPs to withdraw their ETH without forcing leveraged users to unwind their positions, which could otherwise further destabilize the LST/LRT pegs.

Impact of Proposed Changes on Available Liquidity

While the goal of lowering Slope1 is to encourage borrowing and increase utilization, it’s essential to understand the trade-offs. We modeled the proposed parameter changes to assess their impact on the available WETH liquidity if the borrow rate remained at its current level.

Our analysis shows that the proposed changes, while making borrowing cheaper at lower utilization, would reduce the available liquidity buffer at the current market rate.

Source: LlamaRisk, 16th September 2025.

While the market will eventually find a new equilibrium, this reduction in immediate capacity underscores the need for a cautious implementation. A sudden, large incentive to borrow could rapidly consume this smaller buffer and push rates up sharply, leading to volatility.

Recommendation

Based on this analysis, a cautious and incremental approach is the most responsible path forward. We think monitoring LST/LRT peg stability is important—before committing to further reductions.