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

Summary

LlamaRisk supports the modification of wstETH’s Slope1 on the Prime instance and the increased supply cap for rsETH. We thank @TokenLogic for their work and carefully detailed rationale.

wstETH’s Slope1 Reduction

This change should make LRT deposits more attractive on the Prime instance, relieving the rsETH supply cap on the Core instance. A significant amount of liquidity (up to $300M of rsETH) could be migrated or deposited into Prime. We do not see additional risk introduced with this change.

rsETH supply cap increase

rsETH Prime Market is seeing virtually no usage (with 5 rsETH deposited) with rsETH core market having almost 400K rsETH deposited.

Source: rsETH supply across instances, Aave, January 16 2025

Current usage of this asset on Core is almost entirely in the ETH-correlated Emode, taking advantage of the leveraged staking trade. We perceive this asset to be oversupplied on Core because of a lower cost of borrowing (wstETH borrow is 0.85% on Prime but 0.68% on Core). This means users are unevenly supplying rsETH, taking advantage of the ETH-correlated emode. Some rsETH is likely to migrate to Prime under these new parameters.

Source: rsETH Borrow Distribution, Chaos Labs Community Analytics, January 15th 2025

rsETH is priced using its CAPO rsETH/ETH internal exchange rate and ETH/USD market feed. This pricing mechanism reduces reliance on secondary market liquidity, as wstETH is the primary debt asset and collateral for rsETH, maintaining price correlation. Currently, rsETH contains 6,910 wstETH and 1,999 ETHx. If wstETH depegs, the price ratio is preserved since wstETH is both the main debt asset and rsETH collateral. In the unlikely event of an ETHx severe depeg (for example, due to slashing), rsETH would lose 14.8% of its value, dropping to $2,934, which could trigger $597M in liquidations. This represents a tail-end risk.

Source: rsETH Liquidation Simulator, Chaos Labs, January 16th 2025

It is worth noting that rsETH is redeemable for underlying collateral (ETHx, ETH, or stETH) after a 7-10 day withdrawal period, creating short-term dependency on DEX liquidity should liquidation be required. Current DEX liquidity for rsETH is limited, with Cowswap reporting less than 4K rsETH available for swapping at approximately 7.5% slippage. This low liquidity may prevent liquidators from profitably selling collateral, presenting a collateralization risk. The current DEX liquidity represents less than 1% of the existing supply cap on Core, and the proposed Prime supply cap would further increase exposure to the asset. This represents significant exposure relative to the limited DEX liquidity.

(CoW Swap | The smartest way to trade cryptocurrencies), January 15 2025*

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.