MakerDAO Votes to Freeze Aave’s Direct Borrowing of DAI

MakerDAO is taking no chances.

As doubts about crypto credit rock the digital asset landscape, MakerDAO, the protocol behind the DAI stablecoin, voted on June 15 to temporarily disable Aave’s DAI Direct Deposit Module (D3M).

Lending Pool

The move is tied to the drama engulfing Celsius, the crypto bank that suspended deposit withdrawals last week.

Aave is a leading DeFi money market project, with a market capitalization of $866M. Its module is a smart contract that provides trusted third-party lending protocols direct access to generate DAI to a specific pool without posting collateral.

The D3M enables Aave to create DAI that can only be transferred to its DAI lending pool.

Christensen Drops Radical Plan to Remake MakerDAO and Address ‘Fundamental Problems’

Christensen Drops Radical Plan to Remake MakerDAO and Address 'Fundamental Problems'

MakerDAO Confronts Financial Losses, Member Apathy, and Complexity

The Defiant

Disabling the module will mean that Aave can no longer generate DAI at will, allowing it only to pay off existing debts. The change will be available for execution on June 17.

Aave could not be immediately reached for comment, and has not responded to the vote on its Twitter channel.

The decision was urgently proposed by Maker’s Core Risk Unit. Core Unit Facilitator, prose11, asserted the struggling centralized lending protocol Celsius had borrowed 100M worth DAI using stETH — Lido’s ailing Ethereum staking derivative — as collateral.

Amassed Billions

Celsius appears to be struggling to remain solvent after halting withdrawals on June 12, with the crypto bank having previously amassed billions in customer deposits, predominantly from retail investors.

Celsius invested a significant sum of users’ Ether deposits in stETH — a token representing staked Ether on the Beacon Chain, and has also staked thousands of Ether directly.

Those are funds that cannot be accessed until sometime after the Eth2 chain-merge. StETH is currently trading 6.6% lower than ETH. Celsius is also believed to be the largest holder of interest-bearing stETH deposited into Aave.

‘Loaded with Risk’

A follow-up proposal to disable the D3M indefinitely asserts that Aave is vulnerable due to its large exposure to stETH. Moreover, the proposal suggests Aave is subject to additional risks due to its deployments on multiple chains, which may expose it to risks associated with the security of cross-chain bridges. It also cites cross-collateralization, which is when locked collateral can be taken out by other borrowers.

“The current market environment is too volatile and it is separating the stronger lending protocols everywhere, centralized or not, from those who have lower risk standards,” the proposal said. “Unfortunately AAVE is loaded with risk right now with a large exposure to stETH.”

Reduce Risk

Despite 58% of respondents voting in favor of the initial proposal, not everyone believes the D3M should be halted indefinitely. Maker governance forum-goer tbone suggested Aave’s borrowing capabilities be halved to reduce risk without entirely doing away with the revenues generated by the D3M.

LongForWisdom, another member, described the poll as an overreaction in response to the recent drama surrounding Terra and Celsius. He added that the design of MakerDAO and the D3M provide adequate layers of defense against the risk posed by stETH to Aave.