Proposal to increase LTVs on specific pairs. Namely to 0.92 LTV for USDT/USDC and 0.875 LTV for WSTETH/WETH. This implies max leverage of 12.5x and 8x respectively.
Abstract
An E-mode is a specific LTV applied to a specific trading pair. While a conservative LTV makes sense for lending USDT to borrow WETH, it would make sense to increase LTVs specifically for USDT/USDC given high correlation between these two assets.
Motivation
The motivation is increase in trading activity and preparation for the Shanghai update. Once withdrawals are possible, volatility of WSTETH/WETH is likely to decrease. This means that to squeeze out additional yield, LTVs need to be higher.
Similarly, there was healthy interest to go long USDT/USDC during recent market volatility. However, a common bit of feedback was lack of significant leverage to trade the pair.
Risk
USDT, USDC, WETH and WSTETH are some of the most liquid assets onchain, so a liquidation cascade leading to bad debt is highly unlikely, especially given the dynamic liquidation bonus.
In fact, it seems like Aave V3’s E-mode is even less conservative than in this proposal:
This makes sense, the only question I have is timing. LSD pricing could get choppy around Shanghai, so should implementation of the proposed change wait until a certain number of hours/days post-upgrade, or go for it sooner?
I agree. I’m not a fan of taking on more risk before such a significant change.
An unspoken assumption here is that the upgrade happens without a hiccup. It’s unclear whether the possibility of something going wrong with the upgrade is being accounted for.
Given that mentioned assets are highly correlated, I do not see extra risk in raising LTV for them. On the other hand, possibility to maximise capital efficiency will likely to make Euler more attractive. So I would support this proposal
Network upgrades carry risk, and the risk that Euler inherits regarding WSTETH/WETH is increased slashing risk.
At a LTV of 0.875 and assuming the worst-case, that a position is using 99% of their credit, bad debt occurs can occur if Lido suffers a 15.4% or more slash.
I know it’s human nature to assume a positive outcome because nobody here wants to see a negative outcome. Lido has done a fantastic job, but past results do not guarantee future performance, especially during change. We must be objective and assume the worst will happen to protect users.
At what point does overall market exposure for this trade with respect to liquidity impose a significant risk to Euler? If this threshold is exceeded, how quickly can Euler respond to contain the risk?
it is impossible to remove network upgrade risk by still having derivatives assets. Euler already taking that upgrade risk by allowing derivatives assets to become collateral so i don’t think this should be a big concern any more.
I agree with the proposal, risk should only coming from potential depeg and it’s getting lower the closer we are getting into shanghai. I also highly doubt lot of people will do max lev
We would support this proposal. We think this would be a great way to make Euler more attractive to traders. Since the liquidity is so high for these assets and the pairs are highly correlated the rewards of offering higher LTV seem to outway the risk for these pairs.
Appreciate the comparison to Aave. Will there be added documentation for Euler E-mode similar to how Aave documents it?
