Aave at risk of decline as community members deem governance decisions by MakerDAO as “reckless”

Lending protocol Aave (AAVE) announced on Tuesday a new governance proposal by the Aave-Chan initiative, a delegate and service provider for the protocol, to address problems related to MarkerDAO’s Direct Deposit Module (D3M). The proposal’s objective is to implement a 0% Loan-to-Value (LTV) risk parameter for the DAI stablecoin to help users switch to other stablecoins like USD Coin (USDC) and USDT (USD Tether) for collateral. 

AAVE protocol could suffer negative effects of excessive minting of DAI

A new proposal on AAVE points out that the recent governance decisions by MakerDAO are “reckless” and could negatively impact the protocol. MakerDAO’s D3M program has resulted in a significant increase in the credit line for DAI, which has grown from zero to a predicted 600 million DAI within less than a month. 

The potential for the extension of the credit line is 1 billion DAI in the near term, and the proposal cites an example of reckless minting policies at a smaller scale with Angle’s AgEUR (EURA) that minted into EULER and suffered a hack within a week. Angle is an over-collateralized stablecoin protocol and AgEUR is a decentralized Euro stablecoin. Cases like this one highlight the risk of a depeg for,the DAI stablecoin when it is used as a collateral for loans on AAVE. 

Therefore, the proposal suggest some risk mitigation measures without significantly negatively impacting the user base by offering users the ability to switch to stablecoins like USDC and USDT as collateral. 

AAVE trades at $114.03 on Binance, down nearly 12% on the day, likely triggered by Bitcoin’s sharp correction early on Tuesday and traders’ reaction to the proposal.