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Aave Proposal to Mitigate Risks Amid MakerDAO’s DAI Expansion

Aave Proposal to Mitigate Risks Amid MakerDAO's DAI Expansion

TL;DR

  • Aave launches proposal to counter MakerDAO’s DAI expansion risk.
  • The proposal seeks to adjust the DAI risk parameters in Aave, setting the LTV at 0% in all implementations.
  • It is intended to mitigate the potential risks associated with the DAI issuance policy while minimizing the impact on users.

In response to MakerDAO’s aggressive actions with its D3M program, Aave has launched a proposal to adjust the risk parameters of the DAI stablecoin.

The proposal, put forward by the Aave Chan Initiative (ACI) team, suggests setting DAI’s loan-to-value (LTV) ratio at 0% across all Aave implementations.

The motivation behind this proposal lies in MakerDAO’s recent actions, which have resulted in a significant increase in the “D3M” credit line for DAI, going from 0 to a predicted 600 million DAI in less than a month.

With the possibility of this line of credit being extended to 1 billion DAI in the near term, the unpredictability of future governance decisions by MakerDAO raises concerns about the inherently risky nature of DAI as collateral.

These liquidity injections are done on a non-battle tested protocol, with a “hands off” risk management ethic and no security module risk mitigation feature.

Aave Proposal to Mitigate Risks Against MakerDAO DAI Expansion

Aave has previously experienced the consequences of reckless emissions policies on a much smaller scale

Such as the case of Angle’s AgEUR (now EURA) which was created a week before its hack, and the creation of jEUR on Midas which led to the long-term decoupling of the asset.

Given that only a fraction of DAI deposits are currently used as collateral on Aave, and users have sufficient liquidity  to switch to alternative collateral options such as USDC or USDT, this proposal seeks to mitigate potential risks without significantly impacting the base of users.

As for MakerDAO, it is preparing to launch its “Endgame” transformation, which aims to focus the platform towards scalability, resilience, and sustainable user growth.

This involves rebranding the operation with the help of a third-party marketing firm and scaling the DAI decentralized stablecoin to potentially surpass $100 billion in market capitalization.

Despite these developments, Eigenlayer recently overtook Aave to become the second- largest DeFi protocol with $11.5 billion in total value locked (TVL), trailing only Ethereum liquid staking protocol Lido.

However, Aave maintains a significant user base with more than 5,700 daily active users compared to Lido’s less than 430, according to data from Token Terminal.

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