Aave Introduces New Proposal to Adjust MakerDAO DAI Risk Parameters

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Hassan Shittu

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Hassan Shittu

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April 2, 2024

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Aave, a leading lending protocol, has unveiled a new proposal through its Aave Risk Framework Committee (ARFC) to adjust the risk parameters linked to the MakerDAO stablecoin, DAI.

The proposal, detailed in a blog post titled “[ARFC] Risk Parameters for DAI Update,” published on April 2, is centered on updating the risk parameters specifically for DAI. By implementing these changes, Aave aims to minimize potential risks associated with the issuance policy of the DAI stablecoin.

Aave Chan Initiative Proposes 0% LTV for DAI on Aave Deployments in Response to MakerDAO’s Aggressive D3M Program

The proposal, put forward by the Aave Chan Initiative (ACI) team through Mark Zeller, founder of the Aave Chan Initiative, recommends adjusting DAI’s loan-to-value ratio (LTV) to 0% across all Aave deployments. Additionally, it suggests removing sDAI incentives from the Merit program, effective from Merit Round 2 onwards.

This initiative is a response to MakerDAO’s recent aggressive actions, particularly their D3M program, which has seen a rapid increase in the “D3M” credit line for DAI, reaching an estimated 600 million DAI within a short period. There are concerns about MakerDAO’s governance decisions and the potential extension of the credit line to 1 billion DAI, highlighting the inherent risk associated with DAI as collateral.

Furthermore, the proposal highlights the risks associated with liquidity injections in a non-battle-tested protocol with a “hands-off” risk management ethos and no safety module risk mitigation feature.

The proposal aims to address these risks, particularly in light of Aave’s past encounters with the consequences of reckless minting policies. Instances such as Angle’s AgEUR (now EURA) minted into EULER, hacked within a week, highlight the potential dangers of using DAI as loan collateral on Aave. This proposal aims to prevent stablecoin depegging scenarios and safeguard the stability and integrity of the Aave protocol.

Despite these challenges, the proposal aims to mitigate potential risks without significantly impacting Aave’s user base, as only a fraction of DAI deposits are currently utilized as collateral on the platform. Users also have alternative collateral options like USDC or USDT, providing ample liquidity and flexibility.

MakerDAO Evaluates Proposal to Invest $600 Million in DAI into USDe and sUSDe Through DeFi Protocol Morpho Labs

🔗 MakerDAO Considers $600 Million DAI Allocation into USDe and sUSDe

MakerDAO is currently reviewing a proposal to invest $600 million in DAI into USDe and its staked version sUSDe.#CryptoNews #newshttps://t.co/2teq1BVc9B

— Cryptonews.com (@cryptonews) April 2, 2024

MakerDAO is evaluating a proposal to invest $600 million in DAI into USDe and its staked version, sUSDe. This proposal, outlined in a community forum post by MonetSupply from Block Analitica, a risk intelligence firm for decentralized finance (DeFi), aims to leverage the capabilities of the DeFi lending protocol developed by Morpho Labs.

The reasons for investing in USDe and sUSDe are multifaceted. MonetSupply highlighted user preferences for certain financial products and leverages within the DeFi space, indicating a strong preference for USDe over sUSDe pools and higher leverage over lower leverage.

The proposal also outlines financial and strategic benefits, including significant incentives for using USDe and sUSDe collateral on Morpho, reducing liquidity risk, boosting Ethena’s insurance fund revenue, and improving investment security over time.

The initial recommendation suggests setting MakerDAO’s USDe exposure limit at $600 million, with the potential to increase as Ethena’s platform expands. To ensure financial stability, the investment would be capped at $800 million to protect against substantial losses.