This is an archive of our post on Aave governance forum. Read the full thread here.

Summary

LlamaRisk supports the recommended increase in the wstETH borrow rate on the Lido instance. The introduction of ezETH as collateral and the ezETH/wstETH E-mode has attracted significant borrowing demand for wstETH. The wstETH borrow utilization, at 76% of capacity, is now enough to sustain a wstETH lending rate that is equal to what the awstETH lending incentive provided (0.17% APY). It makes sense to sunset this incentive and to raise the wstETH borrow rate.

We analyze a scenario where the utilization remains the same after implementing the proposed changes. We found that the borrowing rate would increase to a maximum of 1.63%. Note that calculating the same scenario by fixing the borrowing rate instead is not applicable, as the current borrow rate (0.71%) is lower than the proposed base rate of 1.00%.

Source: LlamaRisk, November 7th, 2024

With a borrowing rate of 1.63% and ezETH yield of 6.31%, leveraged ezETH/wstETH will be slightly less profitable but still very competitive with a double-digit APY yield. For instance, the ezETH yield layer on Cian Protocol currently yields 14.27% through leveraged ezETH/wstETH on Aave. We expect little churn from this move, as it will remain one of the most profitable risk-adjusted strategies on the market due to the automated farming of EIGEN rewards offered by Renzo.

Details on methodology

We model the Slope1 component of the Interest Rate Model (IRM) as an affine function y = ax + b, where:

• y represents the borrowing rate

• a represents the Slope1 rate

• x represents the utilization rate

• b represents the base borrow rate

Given points A = (0; b) and B = (uOptimal; Slope1 rate), we calculate a using a = (y_B - y_A)/(x_B - x_A). We can then analyze two extreme scenarios: solving for utilization rate x using current borrowing rate y (maximum borrowing sensitivity) and solving for borrowing rate y using current utilization rate x (maximum utilization sensitivity).

These projections assume rational market behavior under perfect conditions, with all other variables remaining constant. The model is valid only when utilization remains below uOptimal, above which the Slope2 component requires separate modeling.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.

The information provided should not be construed as legal, financial, tax, or professional advice.