Another crypto update has been announced regarding protocols. Coinbase has minted a centralized Liquid Staking Derivative known as cbETH, which is minted whenever users stake ETH. For more information about cbETH, interested parties can refer to cbETH V3 ARC 3.
The Aave governance has been presented with an ARFC proposing the activation of emode for cbETH on the Aave Ethereum V3 market. The proposal suggests adding cbETH to emode category "1" for "ETH correlated" assets.
E-mode is a feature that optimizes capital efficiency by grouping together collateral and borrowed assets with correlated prices. This grouping, known as E-mode categories, allows for higher collateralization power when borrowing assets within the same category. For instance, stablecoins like DAI, USDC, and USDT are within the same E-mode category since they are all pegged to the US dollar.
CbETH is currently the second-largest ETH Liquid staking derivative of the V3 market. The activation of emode has a clear use-case for leveraged strategies based on cbETH as collateral to both "long" cbETH at a small discount on secondary markets and increased staking yield via loops strategies. This activation can be done while keeping a conservative approach with the current supply and borrowing caps.
CbETH's ticker is cbETH, and its contract address is 0xBe9895146f7AF43049ca1c1AE358B0541Ea49704. The AIP implementation is to call setEModeCategory() from POOL.CONFIGURATOR to set it to 1. Additional technical details will be available in the payload deployment & contracts published at the AIP stage of this proposal.
It is important to note that the Aave-Chan Initiative is not affiliated with or paid by Coinbase to publish this ARFC. The ACI supports LSD diversity as part of its delegate platform. At the time of writing, Marc Zeller, ACI's founder, does not hold any cbETH.
This update is exciting, and it will be interesting to see the impact of this development on the market.
Why is this proposal being implemented?
The proposal to add cbETH to E-mode is being implemented after evaluating its stability and liquidity. The primary consideration is cbETH's asset volatility, which will determine how well it can perform under the E-Mode LT setting of 93%. The on-chain liquidity and liquidity concentration are also taken into account to understand the efficiency of potential E-mode position liquidations under the E-mode Liquidation Penalty settings of 1%. Overall, the proposal aims to increase capital efficiency and provide users with a better borrowing experience in AAVE.