title: [FIP-12] Deploy wstETH to Aave Protocol
author: @TokenLogic
created: 2024-03-31
Abstract
This publication proposes deploying f(x) Protocol’s wstETH into Aave’s Prime instance, with the resulting yield allocated to the Stability Pool. This strategy enhances protocol stability while improving the user experience for xPosition holders.
Motivation
As f(x) Protocol continues to scale and attract user deposits, capital efficiency becomes increasingly critical. Deploying protocol-owned assets into low-risk, yield-generating strategies enhances capital utilization while reinforcing the protocol’s long-term sustainability.
Integrating f(x) Protocol’s wstETH into Aave v3’s Prime instance aligns with its core objectives: minimizing risk exposure and maximizing capital efficiency.
Key Advantages of This Strategy:
- Improved capital efficiency
- Superior risk-adjusted returns
On the Prime instance, wstETH deposits currently yield 0.22% APY, with the potential to reach 0.47% APY at optimal utilization (Uoptimal). This equates to an 8% increase in overall yield, a meaningful boost that scales with protocol-owned liquidity and directly benefits liquidity providers in the Stability Pool.
To enhance protocol stability and improve the user experience for xPosition holders, it is proposed that the yield generated from wstETH on Aave be allocated to the Stability Pool. This would incentivize stable supply, strengthening system resilience and optimizing outcomes for all stakeholders.
Yield Comparison: Prime v Core
The chart above compares the native yield offered by Aave’s Prime and Core instances. Prime generates the highest returns over time. With the v3.2 liquid eModes implementation, collateral borrowing against wstETH is isolated, with clear risk restrictions enforced at the protocol level. This structure minimizes risk exposure. Additionally, with the upcoming Umbrella upgrade, the wstETH reserve is expected to benefit from active and transparent bad debt coverage.
Liquidity & Risk Management
Based on f(x)’s current wstETH holdings:
- The position represents 4% of the total wstETH liquidity on Prime.
- At 90% utilization (Uoptimal), it accounts for 40% of the available liquidity.
Maintaining a liquidity buffer and a low concentration ratio ensures strong optionality, allowing f(x) to fully withdraw its position at any time.
As the position size grows relative to the reserve, managing liquidity availability becomes increasingly important. To mitigate risks:
- A bot should be maintained to progressively withdraw wstETH in response to tightening liquidity conditions.
- This mechanism ensures safe exits and instant withdrawals, preserving capital and meeting user demand for instant redemptions without exposure to withdrawal delays.
Strengthening Strategic Alignment with Aave
This move deepens f(x)’s strategic alignment with Aave, one of DeFi’s most trusted and recognized platforms. Strengthening this partnership not only enhances f(x)’s visibility but also solidifies its position within the broader DeFi ecosystem.
Specification
If approved by governance, the the wstETH from the f(x) Protocol address 0x250893CA4Ba5d05626C785e8da758026928FCD24 shall be deployed into the Prime instance to receive aEthLidowstETH 0xC035a7cf15375cE2706766804551791aD035E0C2. A suitable buffer amount shall be retained with a bot configured to monitor and manage the position. The resulting yield is to be directed to the fxUSD/USDC Stability Pool.
Disclosure
TokenLogic does not receive any payment for this proposal.
Next Steps
- Gather feedback from the community.
- If consensus is reached, escalate this proposal to the Snapshot stage.
- If Snapshot outcome is favourable, implement this proposal.
Copyright
Copyright and related rights waived via CC0.