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title: [ARFC] Add wstETH to Arbitrum Aave v3 Discussion: https://governance.aave.com/t/arc-add-support-for-wsteth-on-arbitrum-aave-v3/11387 short description: Add wstETH to Arbitrum Aave v3 deployment as collateral with borrowing enabled and the option to create an Ethereum eMode. author: Llama - Defi_Consulting dated: 2023-02-05

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Summary

This ARFC presents the community with the opportunity to add wstETH to the Arbitrum v3 Liquidity Pool.

Abstract

Across the Aave Liquidity Pools, stETH is listed on Aave v2 Ethereum and wstETH is listed on Aave v3 Ethereum. This proposal seeks to list wstETH on the Arbitrum Liquidity Pool as Collateral with Borrowing enabled.

The stETH/wETH rewards-maximising loop on Aave v2 is the main source of borrowing demand for wETH and the wETH reserve generates a material portion of Aave’s revenue, $279k in January 2023. By listing wstETH on Arbitrum users will be able to enter the same recursive strategy creating borrowing demand for wETH and revenue for Aave.

The risk parameters have been provided by Gauntlet and Chaos Labs, with this post using the more conservative of the two risk service providers.

Motivation

The stETH reserve on Aave v2 is the largest reserve across all Aave deployments with $1.56B in deposits, exceeding USDC ($0.81B) and ETH ($1.39B). This is partially due to several communities having built products that deposit stETH and borrow ETH as part of a rewards-maximising strategy.

Demand for borrowing wETH on Aave v2 Ethereum increased significantly when stETH was listed as collateral. InstaDapp, Index Coop, Galleon DAO and others have all built products on top of Aave v2 that utilise the rewards-maximising stETH/ETH strategy. By adding wstETH to the Arbitrum Liquidity Pool, Aave moves closer towards enabling developers to deploy similar products on Arbitrum. This is expected to create borrowing demand for wETH and boost Aave’s revenue.

The charts below show the effect of stETH has had on the Aave v2 Ethereum liquidity pool. stETH drives most of the wETH borrowing demand and resulting wETH fee-revenue. The wETH reserve generated approximately $217k in revenue during December and $279k during January 2023.

Listing of stETH by Aave has enabled Aave to offer the best return on wETH, in wETH terms, across major lending markets, continually outperforming Compound. By listing wstETH on Arbitrum, the Aave community is helping create an environment capable of replicating the success of the Aave v2 Ethereum Liquidity Pool.

Specification

This section presents the risk parameters and interest rates parameters as discussed on the governance forum. The parameters shown below are a combination of Gauntlet’s and Chao’s work and utilise the same interest rate proposed by Llama for wstETH on Arbitrum.

Gauntlet’s and Chao’s combined but differing risk assessments can be found here.

Risk Parameters

Parameter	Value
Isolation Mode	No
Borrowable	Yes
Collateral Enabled	Yes
Supply Cap (in tokens)	1,200
Borrow Cap (in tokens)	190
Debt Ceiling	0
LTV	70.0%
LT	79.0%
Liquidation Bonus	7.2%
Liquidation Protocol Fee	10%

ETH eMode Category

Category	Assets Included	Loan to Value	Liquidation Threshold	Liquidation Bonus
Ethereum Correlated	wstETH wETH	90%	93%	2%

Borrow Rates

Category	Value
Base	0.25%
Slope1	4.50%
Slope2	80.00%
Uoptimal	45.00
Reserve Factor	15.00

Copyright

Copyright and related rights waived via CC0.