Aave V3 LTV and E-Mode Update

Simple Summary

LlamaRisk recommends the following changes:

• Decrease LTV for PYUSD on Ethereum Core from 75% to 0%.

• Decrease LTV for AUSD on Avalanche from 69% to 0%.

• Decrease LTV for wstETH on Gnosis from 75% to 0%.

• Decrease LTV for WETH on Mantle from 80.5% to 0%.

• Decrease LTV for WMNT on Mantle from 40% to 0%.

• Introduce a new WMNT Stablecoins E-Mode.

• Increase borrow cap for wstETH on Ethereum Core from 1 to 7,000.

• Increase borrow cap for wstETH on Ethereum Prime from 1 to 18,000.

Motivation

As per Llamarisk:

PYUSD Ethereum Core

PYUSD can be used as collateral on the Ethereum Core market, where currently 17M PYUSD is being supplied. Assets worth $3.3M are currently being borrowed against it, with the majority consisting of USDe debt at $2.49M (73.8%), followed by USDC at $367K and cbBTC at $142K. Together, these three assets account for roughly 89% of total borrowings.

Given the low demand for PYUSD as collateral and the broader strategy to maintain collateral utility only for blue-chip stablecoins, we recommend disabling PYUSD’s collateralization.

Recommendation

We recommend decreasing PYUSD LTV on Ethereum Core from 75% to 0%.

AUSD Avalanche

AUSD on Avalanche has a total supply of ~$200K with collateral currently enabled. However, similar to PYUSD, it has seen very limited use as collateral, with just $39.4K in debt borrowed against it. The majority of this debt is DAI at 44%, followed by AUSD (self-loop) at 19.5%. Therefore, we also recommend disabling AUSD collateralization for similar reasons.

Recommendation

We recommend decreasing AUSD LTV on Avalanche from 69% to 0%.

wstETH Gnosis

wstETH liquidity on Gnosis has declined, with currently only 154 wstETH worth ~$317K available to be swapped against stables. Given the utility of wstETH, where a total of $12.3M in debt has been borrowed against wstETH collateral, the majority comprising EURe, we recommend decreasing the wstETH LTV to 0% outside E-Mode until liquidity conditions improve.

Recommendation

To address wstETH liquidity concerns on Gnosis, we recommend decreasing the wstETH LTV outside E-Mode from 75% to 0%.

WETH Mantle

Currently, only 7.7 WETH ($14.6K) is available for WETH-to-USDT0 swaps at a 5.5% price impact, reflecting relatively shallow market depth. At the same time, there is ~$11M stablecoin debt, meaning Aave is already significantly exposed to illiquidity risk stemming from stablecoin borrows against WETH collateral. With the removal of the debt ceiling in v3.7, there is a risk of further unchecked debt accumulation.

Recommendation

To mitigate this risk, we recommend reducing the LTV for WETH to 0%, effectively disabling its use as collateral. Should liquidity conditions on Mantle improve, a dedicated WETH-stablecoin E-Mode can be introduced in the future.

WMNT Mantle

Compared to WETH, WMNT liquidity on Mantle is significantly deeper, with up to 2M WMNT ($1.23M) swappable to USDT0 within a 10% price impact. The observed intended use case is stablecoin borrowing against WMNT collateral, as shown below.

Recommendation

To prevent the growth of non-stablecoin borrows, given the volatile nature of WMNT collateral, we recommend reducing WMNT LTV to 0% and setting up a new stablecoin E-Mode.

wstETH Ethereum

Following the oracle misconfiguration incident, the wstETH borrow caps on the Ethereum Core and Prime instances were temporarily reduced to 1 as a precautionary measure. Since the issue was resolved, these borrow caps have remained unchanged. We recommend restoring the wstETH borrow caps to operational levels.

Specification

LTV Update

Instance	Asset	Current LTV	Recommended LTV
Ethereum Core	PYUSD	75%	0%
Avalanche	AUSD	69%	0%
Gnosis	wstETH	75%	0%
Mantle	WETH	80.5%	0%
Mantle	WMNT	40%	0%

WMNT Stablecoin E-Mode

Parameter	Value	Value	Value	Value
Asset	WMNT	USDT0	USDC	GHO
Collateral	Yes	No	No	No
Borrowable	No	Yes	Yes	Yes
Isolated	Yes	-	-	-
Max LTV	40%	-	-	-
Liquidation Threshold	45%	-	-	-
Liquidation Bonus	10%	-	-	-

wstETH Borrow Cap Restoration

Instance	Asset	Current Borrow Cap	Recommended Borrow Cap
Ethereum Core	wstETH	1	7,000
Ethereum Prime	wstETH	1	18,000

References

• Implementation: AaveV3Ethereum, AaveV3Avalanche, AaveV3Gnosis, AaveV3Mantle, AaveV3EthereumLido
• Tests: AaveV3Ethereum, AaveV3Avalanche, AaveV3Gnosis, AaveV3Mantle, AaveV3EthereumLido
• Discussion

Copyright

Copyright and related rights waived via CC0.