Aave Advocates Caution for DAI Amid MakerDAO's Expansive Plans

Decentralized lending platform Aave proposes adjustments to risk parameters for DAI stablecoin, lowering loan-to-value ratio to 0% and removing sDAI incentives to mitigate potential risks stemming from MakerDAO's rapid DAI expansion plans. The move follows concerns raised by the Aave Chan Initiative team regarding MakerDAO's "aggressive" D3M plan, which has swiftly expanded DAI's credit line.

Aave Proposes Cautious Approach to DAI Stablecoin Amid MakerDAO's Ambitious Expansion Plans

In a move to mitigate potential risks stemming from MakerDAO's aggressive expansion plans, decentralized lending protocol Aave has introduced a comprehensive proposal to adjust the risk parameters of the DAI stablecoin. The proposal, submitted by the Aave Chan Initiative (ACI) team through the Aave Risk Framework Committee, aims to strike a balance between safeguarding the platform while minimizing user impact.

Key Proposal Parameters

The ACI proposal encompasses several key measures to enhance risk management for DAI transactions on Aave:

• Loan-to-Value Ratio (LTV): Setting DAI's LTV to 0% on all Aave deployments, effectively eliminating the use of DAI as collateral for loans.
• Merit Program Incentives: Removing sDAI (staked DAI) incentives from the Merit program, commencing from Merit Round 2 onwards.

These measures are a direct response to MakerDAO's recent Direct Deposit Module (D3M) plan, which has rapidly expanded DAI's credit line from zero to an estimated 600 million DAI within a month, with projections reaching 1 billion DAI in the near future.

Concerns Regarding DAI Expansion

The ACI team expressed concerns over the pace and nature of DAI's expansion, highlighting several potential risks:

• Untested Protocol and Risk Mitigation: The D3M protocol, upon which DAI expansion is based, is relatively new and untested, lacking robust risk management features or safety modules.
• Depegging Risks: Historical incidents, such as the recent depegging of Angle's AgEUR (EURA) stablecoin, demonstrate the potential for collateralized stablecoins to lose their peg, posing risks to Aave users who use them as loan collateral.

Minimal User Impact

Despite the proposed changes, the ACI team emphasized that the impact on users is expected to be minimal. Only a small portion of DAI deposits currently serve as collateral on Aave, and users can easily switch to alternative collateral options such as USD Coin (USDC) or Tether (USDT).

Competitive Landscape

The Aave proposal comes amidst increasing competition in the decentralized finance (DeFi) landscape. Eigenlayer recently surpassed Aave as the second-largest DeFi protocol in terms of total value locked (TVL). However, Aave maintains a significantly higher number of daily active users compared to other top DeFi protocols.

MakerDAO's Endgame Upgrade

Meanwhile, MakerDAO is preparing for its highly anticipated "Endgame" upgrade, which aims to scale DAI's decentralized stablecoin from its current market cap of $4.5 billion to "100 billion and beyond," rivaling Tether's USDT dominance. The five-phase plan includes engaging an external marketing firm to rebrand the operation and redenominating Maker (MKR) tokens into NewGovTokens.

Conclusion

Aave's proposed adjustments to DAI risk parameters reflect the evolving risk landscape within DeFi. As MakerDAO pursues ambitious expansion plans, Aave is prioritizing user safety by implementing prudent risk mitigation measures. The proposal demonstrates Aave's commitment to maintaining a robust and sustainable platform for its users while navigating the increasingly competitive DeFi ecosystem.