Gauntlet's weETH Initial Recommendations

[Gauntlet]

Gauntlet has conducted a market risk analysis for weETH initial asset listing

Address: 0x04c0599ae5a44757c0af6f9ec3b93da8976c150a
Oracle Feed: weETH/eETH

Summary

We recommend onboarding weETH as collateral on Moonwell Base deployment. Due to the market demand and future growth of weETH liquidity on Base we think it is appropriate to list this asset.

Risk Parameter Recommendations

Parameters	Values
CF	74%
Supply Cap	1950
Borrow Cap	780
Protocol Seize Share	3%

IR Recommendations

IR Parameters	Recommended
Base	0
Kink	0.35
Multiplier	0.15
Jump Multiplier	4.5
Reserve Factor	0.15

Supporting Data

Market Overview

Metric	Value
Circulating Supply (weETH)	1.49M
TVL	$6.6bn

The TVL within Etherfi has been growing up and to the right with over $6.6bn deposits into the protocol.Currently over 10% of weETH supply is in L2s, with majority of it being on Arbitrum.

About 1.4M weETH is supplied across Defi making up 75% of all eETH deposits.

Out of the weETH in Defi, about 42% (~770k weETH) of it is being used as collateral across lending platforms with aave making up 80% of the supplies.

Supply and Borrow Caps

Borrow and supply caps are the primary parameter recommendations we can make to mitigate protocol risk when listing new assets. Gauntlet recommends setting the borrow and supply caps strategically to balance both risk and capital efficiency. Due to the employement of Exchange Rate oracle as mentioned in the OP’s post, we recommend setting Supply cap to 10% of the circulating supply i.e 1,950 weETH. Currently a 1350 weETH trade would incur a slippage of 10%, which is the par for Liquidation Incentive. Should the protocol need to switch to market rate based peg, about 70% of the collateral can still be liquidated while maintaining profitability of liquidators.

The liquidity on Base is improving with total liquidity on Base amounting to ~2000 weETH.

Collateral Factor

weETH/WETH returns and volatilty

The daily log vol for weETH/WETH is 1.07% indicating high parity with the underlying. The below Exchange rate to market rate graph also shows that weETH’s market rate has closely maintained peg to it’s Exchange Rate. However, the daily annualized vol for weETH Exchange Rate/weETH market rate is about 11.25%.

To calculate the Collateral Factor we would like to employ the following formula

$\text{Collateral Factor} = 1 - (\text{Liquidation Incentive} + \text{Annualized Vol weETH}{\text{Exchange Rate}}/\text{weETH}{\text{Market Rate}})$

This would result in a CF of ~79%, which is closer to the CFs we have recommended for LSTs. However, given the higher overall risk profile we recommend discounting the CF by 5%, implying a CF of 74%.

weETH Exchange rate vs Market rate

IR Parameter Specifications

We recommend setting the IR curves to strategically align with profitable WETH borrowing by setting weETH supply rates above WETH borrow rates at kink.

weETH IR Curves

Utilization	Borrow APR	Supply APR
0%	0	0
35%	5.25%	1.56%
100%	278.25%	236.51%

[Gauntlet]

Gauntlet would like to update the weETH initial recommendations based on the use of Market Rate Oracles for both Optimism and Base.

Summary

Base Risk Parameter Recommendations

Parameters	Values
CF	74%
Supply Cap	900
Borrow Cap	350
Protocol Seize Share	30%

Optimism Risk Parameter Recommendations

Parameters	Values
CF	0% (Expected 74%)
Supply Cap	170
Borrow Cap	85
Protocol Seize Share	30%

IR Recommendations

IR Parameters	Recommended
Base	0
Kink	0.35
Multiplier	0.15
Jump Multiplier	4.5
Reserve Factor	0.15

Supporting Data

Supply and Borrow Caps

Given the use of Market Oracles, we recommend setting the supply cap at notional value that would cause a 25% slippage against WETH. We recommend setting the supply cap at 900 for Base.

For Optimism, we recommend setting the weETH supply cap at a level that would result in a 25% slippage against WETH, based on aggregate values from two DEXs, we recommended the supply cap to be set at 170 weETH, with a corresponding borrow cap of 85 weETH.

Velodrome 25% Slippage

Beethoven 25% Slippage

**

Collateral Factor

We recommend keeping the Collateral Factor unchanged (74%) for both Base and Optimism instances.

IR Parameter Specifications

Similarly, we recommend setting the IR curves to the values previously recommended for both Base and Optimism instances.

[Gauntlet]

Considering the more recent contract address for weETH on Optimism and the respective on-chain liquidity, we have refreshed the Supply and Borrow cap recommendations for weETH in the above post.

[Gauntlet]

Gauntlet would like to emphasize to the community that weETH will utilize Market Rate Oracles rather than Exchange Rate Oracles. The choice of Market Rate Oracles enables a quicker response to market volatility and accounts for external factors affecting weETH. However, due to the inherent nature of market-driven prices, user positions may be more exposed to volatility, necessitating active monitoring to prevent liquidations.