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.