Aave considers dropping DAI as collateral over contagion concerns from MakerDAO’s USDe move

Marc Zeller, the founder of the Aavechan Initiative, has proposed to the decentralized autonomous organization (DAO) overseeing Aave to remove DAI stablecoin’s collateral status within the protocol’s lending ecosystem.

This move comes in response to MakerDAO’s proposal to allocate 600 million DAI into the fast-rising synthetic dollar USDe and staked USDe (sUSDe) through the DeFi lending protocol Morpho Labs.

MakerDAO’s proposal

An analysis by Block Analitica, a prominent MakerDAO advisory council member, highlighted the robust user demand for USDe-backed lending pools within the MakerDAO ecosystem. According to the firm, this demand is primarily fueled by the enticing yield-earning prospects of USDe and the opportunity to acquire ENA tokens.

The analysis suggested a strategic focus on higher leverage USDe pools, particularly those with LLTV ratios of 86% and 91.5%, accompanied by a proportionally larger allocation of DAI.

Ethena USDe is a synthetic dollar supported by several stakeholders within the community. The digital asset has garnered significant attention from both retail and institutional traders owing to its impressive annual yield potential, reaching up to 27% at a certain point.

Despite its allure, some crypto community members have voiced concerns regarding Ethena’s risk profile.

However, Seraphim Czecker, Ethena’s Head of Growth, expressed satisfaction with Ethena’s growth, affirming that it aligns with internal projections. As of the press time, the total market capitalization of USDe stands at $1.6 billion. Aave founder Stani Kulechov called the situation a “Very risky move for DeFi.”

‘Contagion risks’

Zeller explained that his proposal was necessary to “mitigate potential contagion risks for the Aave users.”

According to him, MakerDAO’s latest decision might heighten the risk of utilizing DAI as collateral. He further stressed that an Ethena’s failure could profoundly impact DAI, potentially leading to contagion risks.

He wrote:

“With the potential extension of this credit line to 1 billion DAI in the near term, the unpredictability of future governance decisions by MakerDAO raises concerns regarding the inherent risk nature of DAI as collateral.”

Consequently, he proposed that Aave lowers the risk of contagion by setting the DAI loan-to-value ratio (LTV) to 0% across all versions of the Aave protocol. Additionally, he suggested removing staked DAI boosters from the merit program starting from the Merit Round 2 and subsequent rounds.

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