Ethereum v2 - wETH Interest Rate Curve Upgrade
01Summary
Llama proposes adjusting wETH interest rate parameters on Aave v2 Ethereum to match v3 by reducing Variable Slope1 from 5.75% to 3.80% and introducing a Base rate of 1.00%, aiming to increase utilization and offset declining revenue trends.
- Type
- parameter change
Key changes
- Reduce Variable Slope1 from 5.75% to 3.80% on v2 wETH reserve(high)
- Introduce Base rate of 1.00% (currently 0.00%) on v2 wETH reserve(high)
- Reduce borrowing rate at Uoptimal point from 5.75% to 4.80%(high)
- Align v2 wETH interest rate curve with v3 wETH interest rate curve(high)
Notable concerns
- Borrowing wETH becomes more expensive at utilization below 41%, potentially creating cost disadvantage for low-utilization scenarios
- TVL and daily revenue have been gradually declining despite previous parameter upgrades
- Current wETH borrowed amount has declined from 515.21K to 413.74K, indicating reduced borrowing demand that rate adjustments alone may not address
Generated by Kvorum
02Description
Simple Summary
Llama recommends aligning the wETH interest rate parameters across the Aave v2 and v3 Ethereum Liquidity Pools.
Abstract
Since the recent wETH parameter upgrade on v2, Aave has experienced improved overall revenue. However, TVL and daily revenue are gradually declining.
This proposal intends to adjust the v2 wETH interest rate curve to match the v3 wETH interest rate curve which is expected to lead to high utilization of the v2 wETH reserve and partially offset the emerging declining week on week revenue trend.
Motivation
Since AIP 131 was implemented, the amount of stETH deposited as collateral to borrow wETH has been fairly consistent. However, the amount of wETH borrowed by users who deposited stETH as collateral has reduced from 515.21K to 413.74K between 18th December 2022 and 15th January 2023 (pre Aave v3 launch). The tapering of borrowing demand is reflected in Aave’s wETH nominated revenue figures as shown below.
The market is indicating that there is insufficient demand for borrowing wETH. Three possible reasons are shown below:
- Structured products charge a fee
- Additional smart contract risk
- Elevated exposure to DEX liquidity
Our analysis indicates the Slope1, 5.75%, is most likely the primary causes of the reduced wETH demand. Lowering the Slope1 parameter will enable users to achieve a higher return from entering the recursive loop strategy. The chart below shows how users that deposit stETH and borrow wETH have behaved to date. The date highlighted below is the date AIP131 was executed.
This proposal intends to reduce the Slope1 parameters on the v2 market to 3.8% and introduce a Base of 1%. The borrowing rate at the Upotimal point is reduced from 5.75% to 4.8% (Base + Slope1). Introducing a Base, with a Lower Slope1 (4.8% < 5.75%) parameter, acts to reduce the gradient between 0% < Utilization < Uoptimal compared to having a Slope1 = Base + Lower Slope1.
The graphic below shows the current and proposed wETH interest rate curves.
The graphic below shows the proposed interest rate with Base, Slope1 and Slope2 parameters detailed.
It is worth noting that borrowing wETH becomes slightly more expensive at lower utilization compared to the current wETH interest rate. When utilization is less than 41% borrowing costs are higher, ranging 0 to 0.98%, and when utilization is greater than 41% borrowing costs are lower, ranging 0 to 0.95%. Current utilization is 46% on the v2 deployment which means the borrowing costs would be reduced.
The chart below shows the relative change in borrowing costs for users, comparing the current versus the proposed interest rate curve.
Specification
The below table shows the current and proposed wETH interest rate curve for the Ethereum v2 deployment.
| Parameter | Current (%) | Proposed (%) |
|---|---|---|
| Uoptimal | 80.00 | 80.00 |
| Base | 0.00 | 1.00 |
| Variable Slope1 | 5.75 | 3.80 |
| Variable Slope2 | 80.00 | 80.00 |
| Reserve Factor | 15.00 | 15.00 |
| Stable Slope1 | 4.00 | 4.00 |
| Stable Slope2 | 80.00 | 80.00 |
Implementation
Test cases can be found here
Payload Implementation can be found here
New Interest Rate Strategy deployment script can be found here
Proposal Payload deployed address can be found here
Interest Rate Strategy deployed address can be found here
Security Considerations
The proposal Payload was reviewed by Bored Ghost Developing.
Governance Considerations
Aave governance forum discussion, Snapshot vote and Risk Service Provider feedback.
Copyright
Copyright and related rights waived via CC0.
03Mismatch analysis
The proposal follows Aave's standard governance pattern where a single top-level 'execute()' call is made to a pre-deployed payload contract, and that payload's internal logic (not visible in the decoded calldata) performs the actual interest rate strategy update. The target address in the calldata (0xfb2a7eb134fa2d03d9a2c8fe0a9758132fe15357) exactly matches the 'Proposal Payload deployed address' cited in the description's Implementation section, and the linked source code (AaveV2wETHIRPayload.sol) is stated to encode the Base/Slope1 changes described in the Specification table. Because the calldata itself is opaque (just an execute() call with no arguments), I cannot directly verify the exact numeric parameters (Base=1%, Slope1=3.8%) being set on-chain, but there is no evidence of a mismatch — the target contract identity check is the primary verifiable link, and it matches. No extra actions, omitted actions, or misleading phrasing were found relative to what can be checked. Given the inability to fully unpack the payload's internal calls, confidence is medium rather than high, but there is no basis to flag any discrepancy.","discrepancies":[]}}],
Generated by Kvorum
04Actions
- Target
- 0xfb2a…5357
- Value
- 0 wei
- Function
- fallback()
- Arguments
{}- Calldata
05Tally
Summed from votes
06Voters
No votes recorded yet.
07Forum
- [ARFC] wETH & wstETH Interest Rate Curve - Ethereum Network ↗discourse · high confidence
Arguments for
- wETH borrowing demand on v2 has declined because the current Slope1 (5.75%) makes the wstETH/wETH recursive strategy less profitable, so lowering Slope1 and adding a small Base would restore borrower demand and revenue.— Llamaxyz, MatthewGraham
- Aligning wETH interest rate curves across v2 and v3 supports liquidity migration from v2 to v3 without adding complexity.— Llamaxyz
- A conservative, flat wstETH interest rate curve (low Base, Slope1, moderate Optimal) is appropriate as an initial parameter set given no prior borrowing data, and can be iterated on later as usage grows.— Llamaxyz, Pauljlei, bgdlabs
- Including the rate strategy in the v3 activation proposal avoids extra governance overhead and delay, since the changes are not aggressive and community can iterate post-launch.— bgdlabs
- After Llamaxyz corrected the Slope1 parameter error, the proposed parameters are sound and reasonable to proceed with for v3 launch, adjustable afterward.— bgdlabs
- The proposal has explicit support from the Aave Companies/ACI.— MarcZeller
Arguments against
- The originally proposed wETH parameters, as coded into the contracts, actually increase borrower interest rates at every utilization level rather than lowering them, contradicting the stated intent.— Pauljlei
- The terminology used in Llama's post (e.g., treating Slope1 as the rate at the kink) does not match how Aave's docs and contracts define Slope1, causing confusion and incorrect parameter values.— Pauljlei
- Gauntlet recommends leaving WETH curves unchanged on v2 and matching v3 to the current v2 curve rather than adopting Llama's proposed changes, pending further review.— Pauljlei
Unresolved concerns
- Whether the corrected wETH Slope1/Base parameters will actually achieve the intended effect of lowering borrower rates and increasing wETH borrowing demand was not independently re-verified by Gauntlet after Llama's correction.— Pauljlei
- Long-term calibration of wstETH parameters (Uoptimal, Slope1, Slope2, RF) as the BorrowCap increases remains an open, ongoing exercise dependent on future market behavior.— Llamaxyz
- Potential risk of utilization spiking dangerously high given the relatively low maximum borrower interest rate for wstETH, mitigated only by borrow caps.— Pauljlei
Notable participants
- LlamaxyzCo-proposer who authored the proposal, responded to feedback, corrected a parameter error, and announced the Snapshot vote.
- MatthewGrahamCo-author of the proposal.
- MarcZellerRepresented ACI and gave explicit support/approval for the proposal.
- bgdlabsTechnical team providing implementation rationale, endorsing inclusion of the rate strategy in the v3 activation and confirming they would proceed after corrections.
- PauljleiRepresented Gauntlet, identified a critical terminology/parameter error in the original proposal and recommended against the initial changes.
Generated by Kvorum
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