Title: eIP 52 Update the IRM models for wstETH, cbETH & rETH Author(s): Warden Finance Submission Date: 02.17.2023

Simple Summary

We are proposing to modify the interest rate models for wstETH, cbETH and rETH markets

• Current IRM: Mega (Base=0% APY, Kink(80%)=8% APY Max=200% APY)
• Proposed IRM: Custom (Base=0% APY, Kink(70%)=5% APY Max=200% APY)

The goal of this proposal is to make it more capital efficient for traders to short LSD assets and mitigate the risks associated with the Shanghai upgrade.

Abstract

Shanghai upgrade

Ethereum's 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 its 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 sufficient 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 yields 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 the kinks from 8% to 5%. This will pull back the combined interest rate at the kink to a more reasonable 10%.

Prepare for the 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 fully 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 lower by 10% will add a buffer of safety in case of extreme liquidity decrease.

Expexted Outcome

Increased utilization of wstETH and cbETH pools

• More traders will be able to short wstETH and cbETH
• Increased revenue for lenders
• Increased revenue for the protocol

Risk

Little to no additional risk exposure for the protocol, given current utilization rates. Less risk exposure to the Shanghai upgrade.

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)