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

Summary

LlamaRisk supports the proposed changes, summarized as follows:

Key consideration:

• weETH is listed on Mainnet, Arbitrum, Base, & Scroll.

• The supply utilization is extremely high due to users engaging in leveraged looping, while borrow utilization remains fairly low, except for Scroll market.

• The current borrow rate on all chains falls within the Slope1 parameter of the interest rate model. A 1% increase in the base rate will result in a 100 bpp increase in the current borrow rate, except for the Scroll weETH market with a 155 bpp increase. With this increase, the borrow utilization is expected to decrease slightly.

• Changing uOpt to 30% will mean that Slope2 will be reached at a lower utilization level. This change is expected to enhance the external liquidity of weETH by making supplying on Aave slightly less attractive.

• The reserve factor is already at 45% in most instances, except for Scroll. No adverse effect is foreseen with this change, and a marginal increase in revenue generation is expected.

weETH borrowing is currently available on four markets. Utilization rates are relatively low, between 6% and 13%, and borrow rates are 1.34% and 2.43%. Here are some of the effects of this proposal on those four markets.

What would the new borrow rates be if the utilization rate remains unchanged?

All borrow rates would increase by 100 bpp, except for the Scroll weETH borrow rate, which would increase by 155 bpp because of a decrease in optimal utilization from 45% to 30%, which will change the Slope1 rate.

How much would the current utilization rate have to decrease so that the borrowing rate remains the same?

If the borrow rate increases for users, we can expect the utilization rate to decrease. We estimate the minimum utilization rate we could obtain after the change by considering users to be maximally sensitive to the borrowing rate, hence fixing its current value in the new interest rate equation. In reality, the new utilization rate will sit somewhere between the current one and the minimally calculated one, as users are somewhat sticky and can accept a slight increase in the borrowing rate.

What would be the effect of setting the optimal utilization at 30%?

Slope2 currently has no effect for all weETH Aave instances as the utilization rate is too low to reach it, so we don’t expect any immediate impact from this change. However, in high borrowing demand, the utilization rate will surpass uOptimal faster, which could encourage weETH holders to seek yield on DEX instead.

What would be the effect of setting the Reserve Factor to 45%?

All Aave instances proposing weETH borrowing already have a Reserve Factor of 45%, except for the Scroll weETH market, which has a Reserve Factor of 15%. This change would decrease the supply APY and increase the DAO’s revenue without impacting borrowers, all things being equal. Because the Scroll weETH supply cap and borrow cap are currently maxed out, a slight decrease in the supply APY will help release the pressure.

Disclaimer

This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization funded partly by the Aave DAO.