AaveDAO Considers DAI Collateral Limits Amidst Stablecoin Risk Concerns

Amid concerns raised by Aave Chan founder Marc Zeller about the risks posed by Dai (DAI) as collateral, the AaveDAO is debating a proposal to reduce Dai's loan-to-value (LTV) ratios by 75%. Risk management consultants Chaos Labs have presented an alternative proposal suggesting a 12% reduction, with the goal of maintaining Dai's usability as collateral while mitigating perceived risks associated with its backing by the algorithmic stablecoin eUSD.

AaveDAO Debating Limits on Dai Collateral Amidst Concerns over Stablecoin Risk

The Aave decentralized autonomous organization (AaveDAO) is embroiled in an ongoing debate over limits on using Dai (DAI) as collateral on the Aave lending platform. The discussion gained momentum after risk management consultants Chaos Labs proposed a 12% reduction in Dai loan-to-value (LTV) ratios on April 5th.

The Dai Conundrum

Dai is an algorithmic stablecoin, backed by a diverse portfolio of crypto collateral, including USDC, Ethereum (ETH), and others. MakerDAO governs the issuance of Dai, and has recently come under fire for its aggressive minting practices. On April 2nd, MakerDAO minted 600 million DAI and deposited it in a vault with decentralized lending protocol Morpho, raising concerns about the potential for oversupply.

EUSD Uncertainty

The crux of the debate lies in the nature of eUSD, a stablecoin that serves as collateral for the newly minted Dai in the Morpho vault. According to Ethena protocol, the issuer of eUSD, it is backed by a combination of Lido Staked Ether (stETH) and a corresponding futures short position.

Delta-Neutral Claims and Criticisms

Ethena claims that eUSD is "delta neutral," meaning its value should remain stable regardless of ETH price fluctuations. Critics, however, argue that eUSD could become under-collateralized in bear markets, when ETH futures prices fall below spot prices. Additionally, concerns have been raised about the potential for technical issues within Lido's staking network to impact stETH's value relative to ETH.

AaveDAO's Risk Concerns

Aave Chan initiative founder Marc Zeller, a vocal critic of MakerDAO's Dai issuance practices, initially proposed setting the Aave LTV for Dai to zero, effectively banning its use as collateral. Chaos Labs' subsequent proposal for a 12% reduction in LTV represents a compromise, acknowledging the risks associated with eUSD while still allowing Dai to be used as collateral.

Ongoing Discussion

The proposal from Chaos Labs is still under discussion within AaveDAO, and no formal snapshot vote has yet been scheduled. The debate is likely to continue in the coming days, as AaveDAO members weigh the potential risks and benefits of using Dai as collateral.

Crypto Bear Market Fears

The discussion on Dai LTV limits is occurring amidst broader concerns about the crypto market's vulnerability to bear markets. Should a prolonged downturn occur, the value of crypto assets, including stETH and eUSD, could decline significantly, potentially leading to collateral shortfalls and the need for margin calls.

MakerDAO's Response

MakerDAO has defended its actions, claiming that the newly minted Dai is being properly backed by stable collateral. However, the proposal to reduce Dai LTV on Aave suggests that concerns about its stability persist within the broader crypto community.

Conclusion

The ongoing debate within AaveDAO highlights the challenges and risks associated with using decentralized stablecoins as collateral in lending platforms. As the crypto market continues to evolve, it is essential for protocols like MakerDAO and Aave to carefully assess the risks associated with their respective stablecoins and take appropriate measures to mitigate potential vulnerabilities.