AaveDAO Continues Discussion on Dai Collateral Limits Amid Criticism of MakerDAO
Summary:
The Aave Decentralized Autonomous Organization (AaveDAO) has been evaluating potential adjustments to Dai (DAI) collateral limitations. Chaos Labs, a risk management consultancy, proposed a 12% reduction in Dai's loan-to-value ratio while the Aave Chan initiative founder suggested a more drastic 75% decrease. This comes amidst criticisms for MakerDAO after it minted 600 million DAI for a vault with decentralized lending protocol Morpho. An ensuing proposal could inflate the stablecoin's supply capacity to 1 billion. Furthermore, the AaveDAO deliberation also revolves around the risks of eUSD, another stablecoin, which critics argue could become under-collateralized under certain market conditions. No official vote on these proposals has been scheduled yet.
On April 5, Aave's decentralized autonomous organization (AaveDAO) continued discussions about adjusting limitations for Dai (DAI) collateral as risk management consultants at Chaos Labs suggested a new approach which would decrease Dai loan-to-value ratios (LTV) by 12%. Before this, Marc Zeller, founder of the Aave Chan initiative, had advocated for a 75% reduction. Aave is a digital currency lending platform operating on various blockchain networks and allows individuals to take loans in one digital currency while using another as a security deposit. The platform is led by Aave token holders under AaveDAO. Dai, an algorithmic stablecoin backed by various forms of cryptocurrency collateral including Ethereum (ETH) and USDC (USDC), is issued by the Maker protocol, which is controlled by MakerDAO.
On April 2, the AaveDAO forums saw MakerDAO face criticism after minting 600 million DAI and placing it into a decentralized lending protocol Morpho vault. An earlier proposal on the MakerDAO forums on April 1 suggested increasing the vault's minting limit to 1 billion DAI, which could result in a greater supply of the stablecoin. MakerDAO asserts that the freshly minted Dai will be loaned to end users who deposit the stablecoin eUSD into the Morpho protocol, maintaining that these new coins will be sufficiently backed by stable collateral. However, critics believe that eUSD is a risky asset and accuse MakerDAO of recklessly using it for collateral purposes.
On April 2, Zeller suggested that the Aave LTV for Dai should be zero, completely prohibiting its use as collateral for new Aave loans, citing concerns about the inherent risk posed by DAI as collateral after MakerDAO's recent "aggressive actions". The proposal has not yet reached the voting stage and is under discussion. On April 5, in response to the evaluation of the new vault's risks by AaveDAO's risk management consultant, Chaos Labs, proposed a 12% reduction in LTV instead, which would require borrowers to maintain a higher collateral-to-loan ratio to account for the potential increase in risk, but would still allow Dai users to use it in new loan collateral. As it stands, Aave only permits Dai depositors to borrow up to 75% of their Dai value. Chaos Labs' proposal would decrease this to 63%.
The key point of the debate surrounds the nature of the stablecoin eUSD, issued by the Ethena protocol. As per Ethena, eUSD is backed by two elements: an amount of Lido Staked Ether (stETH) that market activists invest in the protocol, and a corresponding short futures position that hedges the deposit's underlying ETH. Notwithstanding the portrayal of eUSD as delta-neutral, critics say it can become under-collateralized under two circumstances - in a bearish crypto market with low ETH futures prices, or should a technical issue within Lido's staking network cause a drop in stETH's value relative to ETH.
A public discussion was held on April 3 by Ethena protocol developers, featuring the presence of Rune Christenson, founder of MakerDAO, CEO of the Morpho development team Paul Frambot, and Marc Zeller from Aave Chan. Zeller's stance was that MakerDAO and Morpho lacked the necessary measures to protect Dai, while the remaining participants claimed that eUSD is somewhat a risk to the Maker protocol, but it's adequately managed by all three project teams - Maker, Ethene, and Morpho. As of now, the proposal for reducing Dai LTV on Aave is still under discussion and no official vote has been scheduled or created.
Published At
4/6/2024 12:38:10 AM
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