[TEMP CHECK] Deploy an Etherfi/Stablecoin Aave v3 Instance

Governance
1

[TEMP CHECK] Deploy an Etherfi/Stablecoin Aave v3 Instance

Author: @ACI

Date: 2024-07-05

Summary

This proposal suggests deploying an Aave v3 instance focused on providing liquidity for weETH holders to borrow stablecoins.

Motivation

The demand for borrowing wETH on Aave using weETH as collateral is extremely high, with caps being filled within minutes each week.

While this $2B growth is welcomed and responsible for ~$12.5M yearly revenue (at current ETH prices) for the DAO, it has created some frustration for significant users looking to borrow stablecoins using their weETH as collateral.

With this asset being constantly at cap, users are wary of leveraging Aave for this use case as they have legitimate concerns about their ability to add more collateral/debt to (de)leverage following market conditions.

To provide weETH holders with more suitable options, we propose creating a dedicated weETH/stablecoin Aave v3 Instance.

This market also lays the groundwork for future integrations & synergies with EtherFi’s Cash product.

Specification

The proposed weETH/Stablecoin Aave v3 instance will implement the following:

  • The market will include weETH, USDC, and a new GHO facilitator.

This GHO facilitator will be one of the highest quality collateral having only an eth-correlated asset as collateral.

  • This market will not have E-Mode, but due to its focused nature and limitation of cross-collaterals, it’s proposed to have a higher LTV/LT status for weETH than for the main instance.

  • For the first 6 months, the GHO borrow rate will be slightly lower than on the main Aave instance to kickstart liquidity & boost demand.

The risk steward will dynamically adjust weETH supply caps based on stablecoin liquidity to ensure stablecoin borrowing remains viable.

  • The GHO stewards will maintain the Exposure and borrow caps of this new GHO facilitator to keep tight control on GHO peg & liquidity.

In addition, we propose that the Aave DAO consider the following:

  • Introduce a stablecoin deposit incentive program to kickstart stablecoin liquidity in this new instance using Merit or other initiatives to be discussed.

The deployment will be handled by Catapulta on behalf of the Aave DAO.

Disclaimer

The ACI has not been compensated by Etherfi for the publication of this proposal.

The ACI and several ACI team members are both weETH and ETHFI holders.

Next Steps

  1. If consensus is reached on this [TEMP CHECK], escalate this proposal to the Snapshot stage.
  2. If the Snapshot outcome is Yae, escalate to the ARFC stage.
  3. Publish a standard ARFC and collect community & service provider feedback before an ARFC snapshot.
  4. If the ARFC snapshot passes, publish an AIP vote for final confirmation and enforcement.

Copyright

Copyright and related rights waived under CC0

6 Likes
2

Thank you @MarcZeller for interesting proposal.

Deploying Aave V3 instances in response to market demand is highly rational, and Saucy Block supports this proposal.

2 Likes
3

Supporting this proposal.
Having a dedicated market towards a protocol gives Aave the modularity some people were looking for in other protocols.
This offers better risk management, specific parameter and especially excited for the new GHO facilitator.

3 Likes
4

We would like to understand the rationale behind deploying a weETH-stablecoin instance rather than a weETH-WETH instance.

Given that the common looping strategy is to supply LRT/LST to borrow WETH (or even borrow in kind for more LRT/LST), we feel that the weETH-WETH instance would have higher demand and bring in more revenues for the DAO. Such an instance would be similar to the Lido Aave v3 instance discussed here.

2 Likes
5

Hi @MarcZeller,

Something that would add more colour to this discussion is an alternative option that addresses the wETH collateral and stablecoin debt market opportunity.

On the main Aave v3 deployment, the ETH Reserve’s utilisation could be reduced to nearer the Uoptimal to help reduce the risk of the LST/ETH looping strategy generating a negative yield, and when combined with a wETH Supply Cap increase, it would enable wETH depositors to access existing stablecoin liquidity. This appears to be a more immediate and lower-cost solution.

  • Revise lower wETH Borrow Cap to 90% utilization (2.7% BR for ETH)
  • Increase weETH Supply Cap

At this point in time, our preference is for more discussion around how the main ETH Aave v3 deployment can be configured to enable weETH to be deposited as collateral and used to borrow stablecoins. This appears to be a lower lift and more economic outcome for the DAO, and we would welcome any insights from @ChaosLabs before casting a vote on this proposal.

There is also the potential for wstETH/wETH strategies to migrate to the new Lido instance of Aave v3, which would then make available more wETH for weETH collateral holders to draw upon.

3 Likes
6

The current proposal has been escalated to TEMP CHECK Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

1 Like
7

Chaos Labs supports the deployment of an Aave V3 instance intended to facilitate borrowing of stablecoins with weETH.

Additional Considerations

  • The deployment of this instance may coincide with the launch of the looping-focused wstETH/WETH instance, which could cause rate volatility as positions are migrated.
  • We find that there is significant borrowing demand against yield-bearing ETH derivatives, as shown by wstETH on Mainnet. As mentioned in the proposal, weETH’s non-WETH borrows have been limited by massive demand for weETH looping.

Untitled - 2024-07-16T185423.891
wstETH

Next Steps

Following the likely passage of the Temp Check, we will provide recommended parameters to launch this new deployment.

3 Likes
8

Why does @ChaosLabs support this? What are the pros and cons?

1 Like
9

The current TEMP CHECK Snapshot ended recently, reaching out both Quorum and YAE as winning option, with 689K votes.

Therefore the TEMP CHECK has passed.

Next step will be the publication of an ARFC to continue gathering feedback from both community and Service Providers.

1 Like
10

This topic was automatically closed 30 days after the last reply. New replies are no longer allowed.