[ARFC] Increase Community Preference For Supply Cap Limits

Author: ACI

Date: 2024-08-12

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Summary

This proposal suggests increasing the informal supply cap restriction previously set by the community in the past vote [Temp Check] - Community Preference for Supply Cap Limits for LSTs.

Motivation

LST collateral and correlated asset borrowing with E-Mode is one of the primary use cases of Aave across networks. Previous discussions around supply cap methodologies resulted in the [TEMP CHECK] vote to limit the maximum supply cap of an LST to 75% of that LST’s circulating supply.

In the year and a half since that vote, Aave has continued to grow and new liquid restaking tokens (LRT) like weETH have shown strong demand as collateral in the protocol. LRTs have also seen strong proliferation to various chains with varying levels of the total supply spread across multiple L2s.

As a result, Aave is often the main location for storing LST and LRTs on any given chain and often represents an outsized share of the total supply on any given chain.

In this new environment, Aave has becomes the main location for LRT supply on chains like Scroll and Base, while also driving LST/LRT demand on chains like Polygon PoS. Simply put, when Aave increases LST supply caps, new supply comes to fill it.

LST and LRT have also had longer time in the market, with clear support for peg and asset profiles developing. Aave’s use of oracles based on the LST redemption rate and implementation of CAPO have allowed for reduced risk from the secondary market volatility.

This calls for a new limit on a collateral’s supply limit as a percentage of the total supply. This proposal suggests raising the community preference supply cap limit to 90% of the total supply.

Specification

• The community preference will update from 75% of total supply to 90% of total supply.
• Risk Parameters will be updated by Risk Service Providers based on the results of this ARFC as needed.

Useful Links

[Temp Check] - Community Preference for Supply Cap Limits for LSTs

Disclaimer

The ACI has not been compensated for the publication of this proposal.

Next Steps

1. Publish a standard ARFC and collect community & service provider feedback before an ARFC snapshot.
2. If the ARFC snapshot passes, this community preference becomes canon and risk service providers incorporate this into current and future recommendations.

Copyright

Copyright and related rights waived under CC0