Staked ETH and AAVE Risk (June 11th Update)

After careful review and monitoring the stETH situation, I’ve noticed the “de-peg” hovering mostly in lines of 4-5% between ETH and stETH. Effectively once the efficient arbitrage is available, this de-peg most likely will decrease substantially (when ETH staking would be two-way stream - arbitrageurs would be able to buy stETH unlock the underlying ETH with profit when stETH is trading below the peg). I would not expect them to trade completely in pair as there is always some additional risk involved with derivative assets, which is acceptable.

The bigger positions concern me only to the extent that we don’t have much information on how these more sophisticated users would recapitalize their positions. We have seen many sophisticated users blow their positions up since they might use all their available liquidity or might not be willing to take the loss at this point.

Since Gauntlet is in contact with these users would be interesting to know @jmo of their risk mitigation plans which would help to assess the measures to be taken. Hopefully their measures are leaning towards providing additional collateral instead of selling stETH on the market to cover their ETH borrows since this would cause additional down pressure on stETH and increases the risk for the de-pegging.

Would not mind to increase the LT to 85% as it would bring wider breathing space to avoid liquidations together by decreasing the max LTV for new positions to avoid creating additional risk in case the appetite to borrow ETH against stETH comes back mid-term (and would help later to decrease it when the effective arbitrage is in place).

Additionally, would be interesting if Gauntlet could analyse the Curve liquidity on stETH and the sizes of those positions, given that any bigger position exit from stETH could actually further decrease the liquidity (increase the de-peg) and affect the ability to liquidate for these positions that are closest to potential liquidations.