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AaveDAO Evaluates DAI Limits Amid eUSD Stability Concerns

TL;DR

  • AaveDAO is currently assessing a proposal by Chaos Labs to adjust DAI collateral limits due to concerns with eUSD’s stability.
  • This discussion is critical as it touches on the broader issues of risk management and stability within the DeFi ecosystem,

AaveDAO, a decentralized autonomous organization supervising the Aave crypto lending platform, is currently weighing a risky proposal of Chaos Labs for Dai (DAI) collateral limits at this time. Following on the heels of this, the discussion has centered on the partial coverage of eUSD by Dai, which raises concerns over the 12% decrease in the Dai loan-to-value (LTV) ratio. The approval is following the MakerDAO’s plan to mint 600 million DAI, based on eUSD, and call it for a vault through the borrowing protocol Morpho which created concerns within the Aave community.

The critical issues surrounding the controversies

This one is rooted in the characteristics of eUSD which is a stablecoin token of the Ethena network that is backed partly by stETH and partly by a corresponding cash-settled futures short. Besides the snake, this design is engineered to be said to be “delta neutral” and it is meant to remain stable if the price of Ethereum (ETH) gets higher or falls down. While proponents claim that eUSD is an effectual substitute for decentralized stablecoin when the market is bearish or Lido’s staking network encounters technical problems, some critics still believe that eUSD might be under-collateralized at some point, leading to instability for DAI.

The sharp response of Marc Zeller, founder of the Aave Chan initiative, towards the collateral problem of Dai for a zero Aave LTV is a quite stern decision to wipe every stakeholder’s worries about the possible losses of market cap. Whereas the radical proposal of a 20% LTV reduction by Chaos Labs is a bid for a perfect balance between the matter of risk management and Dai being acceptable as collateral. One step down in borrowing would lower the limit against Dai deposits considering that instead of 75%it would reach 63% which represents a measure to mitigate risk while still allowing Dai to form part of the ecosystem.

Further issues and the community’s reaction

The issue of Aave’s collateral limits for Dai, on one side, reflects detrimental factors in the crypto community regarding the stability and risk management of crypto financial protocols. Critique, including hetero-sexual finance architectural Andre Cronje and online-educated bowtie-iguanas, have inherent fears of it happening that eUSD can be under-collateralized resulting into bad consequences for the DeFi community.

As mentioned earlier, the dialogue has highlighted that it is also a challenge to stringent DeFi protocol to innovate and manage risks. Through the very fact that many DeFi projects, such as MakerDAO, Ethera, and Morpheus, may be involved in the eUSD issue and backing, the environment within the DeFi space where multiple connections exist and close attention to creating new financial tools is required is emphasized.

Looking forward

However, as the decision-making process of AaveDAO is underway, the governed outcome of the debate is going to be resolute in terms of Dai’s future prominence as collateral on the Aave system and for DeFi as a whole. We observe the discussion implies that technology is a very dynamic thing and that any financial services based on it should be conducted carefully and with a consideration of the risks involved. There would be a lot of crypto fanbase waiting the decision of AaveDAO while it is implementing certain steps; moreover, if the final decision affects the perception of stability coin in DeFi, the whole concept could be in danger.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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Haseeb Shaheen

As a Web Researcher and Internet Marketer, Haseeb Shaheen delivers relevant valuable content for audiences. He focuses on financial and crypto market analysis, as well as technology-related areas that help people change their lives.

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