2023-01-30T05:00:00Z→2023-02-05T05:00:00Z
Author(s): Warden Finance
Submission Date: 01.30.2023
RFC: wstETH & cbETH - Reduce and Move IRM Kink
Simple Summary
We are proposing to modify interest rate model for wstETH and cbETH markets
- Current: IRM Mega (Base=0% APY, Kink(80%)=8% APY Max=200% APY)
- Proposed: Custom (Base=0% APY, Kink(70%)=5% APY Max=200% APY)
Goal is to make it more efficient for traders to short wstETH and cbETH and mitigate risk associated with Shanghai upgrade.
Abstract
Shanghai upgrade
Ethereum Shanghai upgrade will allow ETH stakers to remove their staked funds as validators, effectively making staked ether liquid.
This might cause a significant negative impact on LSD assets liquidity, since part of the purpose of these products is to allow staked ether to be traded. The reaction is hard to quantify, since this is the first event of such nature.
State of Euler LSD Markets
Euler’s current lending markets offering for LSD assets is the following:
- wstETH ($130M supply, collateral tier)
- cbETH ($29M supply, collateral tier)
- stETH ($5.4M supply, collateral tier)
- rETH (soon to be onboarded)
wstETH and cbETH markets encompass 38% of total supply on Euler and 90% of LSD markets total supply.
Here’s a quick overview of the two markets
- wstETH
- 27% utilization
- 7.67% borrow apy, including staking yield
- cbETH
- 17% utilization
- 5.55% borrow apy, including staking yield
Motivation
Increase Borrow Activity
Utilization for wstETH and cbETH markets are sitting low and effective borrow rates are high. Incentives are not good enough for borrowers to trade on these markets, due to the staking yield being added to Euler’s borrow APY.
For example, when utilization is at kink, the effective borrow rate for these markets are 13% (8% borrow APY + 5% staking yield).
A kink of 5% instead of 8% (total = 10%) would incentivize more traders to borrow.
These markets would greatly benefit from an adapted IRM, which would take into consideration staking yield in order to adjust rates. A healthy target for utilization would be closer to the kink, at around 50% utilization (~2x current wstETH utilization and ~3x current cbETH utilization).
Historically, borrowers are willing to pay about 9% APY at maximum to short wstETH. We propose updating kink from 8% to 5%. This will pull back the combined interest rate at kink to a more reasonable 10%.
Prepare for Shanghai upgrade
Given the possibility of a liquidity shortfall event, we are proposing to move the kink of both assets at 70% utilization instead of 80%.
As of right now, these assets do have healthy amounts of on-chain liquidity:
- wstETH (link to full report)
- $240m liquidity on 62 dex pools
- 0.2% slippage for $5m trade size
- cbETH (link to full report)
- $29m liquidity on 19 dex pools
- 0.8% slippage for $5m trade size
Of course, this is not totally representative of the liquidity profile after the Shanghai upgrade, but it gives a good starting point to look at. cbETH is definitely the most exposed to liquidity risk.
Moving the kink -1000 bps will add a buffer of safety in case of extreme liquidity decrease.
Outcome
- Increased utilization of wstETH and cbETH pools
- More traders can short wstETH and cbETH
- Increased revenue for lenders
- More revenue for protocol
- Risk
- Little to no additional risk exposure for protocol, given current utilization.
- Less exposure to Shanghai upgrade potential liquidity crash for LSD assets.
Specification
We propose using the following model for both markets:
- Current: IRM Mega (Base=0% APY, Kink(80%)=8% APY Max=200% APY)
- Proposed: Custom (Base=0% APY, Kink(70%)=5% APY Max=200% APY)