Amid the troubles surrounding crypto bank Celsius, MakerDAO, the organization behind the dollar-pegged stablecoin DAI, voted last Wednesday to temporarily disable Aave’s so-called DAI Direct Deposit Module (D3M).
MakerDAO disabled Aave’s DAI loans
D3M allows the Maker ecosystem to interact with third-party loan pools such as Aave. In this case, the objective is to ensure that the maximum variable interest rate for loans is below an interest rate decided by the Maker governance.
Aave is a leading DeFi project. It currently has a market value of US$866 million. Its module is a smart contract that provides direct access to third-party borrowing protocols to generate DAI for a specific pool.
In practice, D3M allows Aave to create DAI that can only be transferred to its loan pool. Thus, disabling the module means that Aave will no longer be able to generate DAI at will. That is, it will only be possible to pay existing debts.
As reported by The Defiant, the change will be available to play on June 17th.
The decision in question was urgently proposed by Maker’s Core Risk Unit. That’s because the Celsius protocol – which halted withdrawals in the last week – had borrowed 100 million DAI using stETH, Lido’s ETH staking derivative, as collateral.
On June 13, Celsius stopped user withdrawals. The protocol team cited “unfavorable market conditions” as a justification for the move. However, he did not provide further details.
After that, on Wednesday (15), Celsius decided to start a complete restructuring of its activities. For this, he hired a law firm specializing in restructuring. In addition, Citibank would also be helping with the task of revamping activities.
Celsius invested a significant sum of users’ Ether deposits in stETH – the token representing ETH staking on the Beacon Chain.
Furthermore, the protocol staked thousands of Ether directly. Celsius is believed to be the largest holder of stETH with interest deposited on Aave.
In this regard, the proposal to disable D3M stated that Aave is vulnerable due to its large exposure to stETH.
Furthermore, the proposal suggests that Aave is subject to more risks due to its multi-chain deployments.
“The current market environment is very volatile and is separating the strongest lending protocols everywhere, centralized or not, from those that have lower risk standards,” the proposal reads. “Unfortunately, AAVE is loaded with risk now with a large exposure to stETH.”
58% of respondents voted in favor of the freezing proposal. However, not everyone believes that D3M should be stopped indefinitely.
Maker governance forum members suggested halving Aave’s loan resources. The objective is to reduce risk, but without eliminating the revenue generated by D3M.