25 April, 2024



Aave Proposes Major Risk Reduction Measures for DAI Borrowing

03 Apr, 2024

03 Apr, 2024

  • Aave proposes 0% LTV for DAI collateral aiming to prevent borrowing against DAI.
  • Removal of sDAI incentives from Aave’s Merit program suggested reducing contagion risk.
  • Aave seeks to mitigate contagion risk to its protocol amidst DAI’s potential 1 billion extension.

The Aave DeFi lending protocol is proposing significant changes to how it handles the DAI stablecoin as collateral amidst MakerDAO’s aggressive expansion plans. The proposal, initiated by the Aave Chan Initiative (ACI), suggests significant adjustments to DAI’s loan-to-value ratio (LTV) across all Aave deployments. 

The Aave Risk Framework Committee (ARFC) is responsible for assessing and proposing adjustments to the risk parameters associated with various assets supported on the Aave platform. The core concern is MakerDAO’s aggressive expansion of its DAI credit line through the D3M program. 

The significant growth of DAI has raised concerns about its stability particularly if used as collateral. With the potential extension of DAI to 1 billion, Aave is worried about “contagion risk”, which could lead to problems with DAI spilling over and impacting the Aave protocol. In response to these worries, Aave has proposed key changes to mitigate these risks.

The first key change proposed by Aave is a 0% LTV for DAI. This move would effectively prevent users from borrowing any assets against DAI on Aave. The second key change is the removal of sDAI incentives within Aave’s Merit program. The proposal suggests that removing incentives for staked DAI (sDAI) would help to reduce the risk of contagion.

These proposed changes by Aave are aimed at enhancing the stability of DAI and reducing the potential risk of contagion to the Aave protocol. As the DeFi space continues to grow and evolve, it is crucial for protocols to mitigate risks and prioritize stability to ensure the longevity and success of the ecosystem.

According to the proposal, these changes are designed to minimize user disruption. With alternative stablecoins like USDC and USDT readily available, users are expected to have options. Mark Zeller, founder of the ACI, emphasized the importance of these adjustments in mitigating potential contagion risks for Aave users. 

This proposal comes amidst broader developments in DeFi. MakerDAO is preparing its “Endgame” plan which is a strategic shift aimed at scaling DAI’s usage. However, Aave’s focus is on ensuring stability within its own protocol.

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