In the chaotic world of decentralized finance (DeFi), where innovation is rampant and risks are always around, recent events in the Aave ecosystem have sparked intense debate and scrutiny. In this blog, we want to break down what's been happening and make it easier for you to understand what's going on with two of the biggest players in the leverage landscape.

On March 22nd, 2024 a proposal was put up to deploy a substantial sum into Spark's USDe sUSDe/DAI vaults on Morpho Blue, aiming to increase lending facilities from 100 million DAI to a staggering 600 million DAI, with potential extensions to 1 billion DAI. The catch? Most funds would be lent out at high loan-to-value (LTV) ratios, exceeding 90%.

The measures seem to be mainly driven by the reducing DAI market share over the past 6 months.

Maker protocol successfully introduced the Direct Deposit Module (DDM), sending DAI into Spark DAI Morpho Vault 25. This vault then spread the DAI across specific markets for sUSDe and USDe, each with its own supply limits. Maker has full control over the settings of Spark DAI Morpho Vault DDM, managing parameters like DC-IAM, Line, Gap, and Ttl, as well as supply caps for each market within the vault. This new vault from Spark, embraced by SparkDAO as part of the MakerDAO Endgame: Launch Season, marks an exciting development.

• DDM DC-IAM Parameters:

  • Line [This represents the maximum amount of DAI that can be deposited into the Spark DAI Morpho Vault using the Direct Deposit Module.]: 100 million DAI

  • gap[The gap indicates how much additional DAI can be deposited beyond the line before any action needs to be taken]: 100 million DAI

  • ttl[stands for "time to live." It refers to the duration for which the deposited DAI remains available for use in the Spark DAI Morpho Vault before it needs to be replenished or adjusted. ]: 24 hours

As the community grappled with this proposal, Block Analytica entered the fray on April 1st, proposing the expansion but with a focus on managing associated risks.

However, in response to this,  Marc Zeller of Aave DAO proposed a 0% LTV across the protocol, citing contagion risks tied to DAI's substantial market cap and lack of battle testing, which was supported by Stani, founder of Aave.

Meanwhile, discussions raged on the Aave forum regarding the potential onboarding of USDe to Aave v3 on Ethereum on March 19th, raising questions about conflicting positions of the Aave DAO since the DAO didn’t consider allowing risk-isolated collateralization for DAI like USDe.

Amidst this chaos, on April 5th, the DAI supply soared back to $5 billion, highlighting the significance of prudent risk management in the DeFi landscape.

Chaos Labs soon entered the picture with a comprehensive analysis of DAI markets and associated risks, proposing conservative and aggressive alternatives.

Both approaches prioritize risk management but differ in their pace and extent of adjustments, with the conservative approach opting for a more gradual reduction while the aggressive approach favors immediate and more significant changes.

In the midst of this chaos, the Aave Chain initiative expressed support for the conservative approach, underscoring the importance of mitigating risk in the face of rapid growth and evolving challenges.

As people involved in DeFi move through these uncertain times, it's important to think about what it means for the whole industry. The things happening in the Aave ecosystem show us that we need to be careful with how much risk we take, even when we're excited about growing quickly. We should remember to be cautious and plan ahead, even when things seem to be going well.

In conclusion, the above turn of events underscores the complex dynamics inherent in DeFi, where innovation and risk intertwine. As we chart the course forward, let us heed the lessons learned and strive for a more resilient and sustainable decentralized financial ecosystem. It also shows that despite short-term disagreements across ecosystem players, a longer-term coherence is always more beneficial for the broader DeFi ecosystem.

Lucidity is excited to be building the leverage aggregator for similar situations, quipping users with more clarity, control, and convenience over their leverage positions.