Marc Zeller, founder of the Aavechan Initiative, has recommended to the decentralized autonomous organization (DAO) overseeing Aave to eliminate DAI stablecoin’s collateral status within the protocol’s lending ecosystem.

This proposal is in response to MakerDAO’s plan to allocate 600 million DAI into the growing synthetic dollar USDe and staked USDe (sUSDe) through the DeFi lending protocol Morpho Labs.

MakerDAO’s Proposal

An analysis conducted by Block Analitica, a prominent member of MakerDAO’s advisory council, highlighted significant user demand for USDe-backed lending pools within the MakerDAO ecosystem. The firm attributes this demand to the attractive yield-earning potential of USDe and the opportunity to acquire ENA tokens.

The analysis suggests a strategic focus on higher leverage USDe pools, particularly those with LLTV ratios of 86% and 91.5%, along with a proportionally larger allocation of DAI.

Ethena USDe, a synthetic dollar supported by various stakeholders within the community, has attracted considerable attention from both retail and institutional traders due to its impressive annual yield potential, reaching up to 27% at one point.

Despite its appeal, some members of the crypto community have expressed concerns about Ethena’s risk profile.

However, Seraphim Czecker, Ethena’s Head of Growth, has expressed satisfaction with Ethena’s growth, stating that it aligns with internal projections. As of the current press time, the total market capitalization of USDe stands at $1.6 billion. Aave founder Stani Kulechov described the situation as a "Very risky move for DeFi."

‘Contagion Risks’

Zeller argues that his proposal is necessary to "mitigate potential contagion risks for the Aave users."

He believes that MakerDAO’s recent decision could increase the risk of using DAI as collateral. He further emphasizes that a failure of Ethena could significantly impact DAI, potentially leading to contagion risks.

Zeller wrote:

"With the potential extension of this credit line to 1 billion DAI in the near term, the unpredictability of future governance decisions by MakerDAO raises concerns regarding the inherent risk nature of DAI as collateral."

As a result, he proposes that Aave reduces the risk of contagion by setting the DAI loan-to-value ratio (LTV) to 0% across all versions of the Aave protocol. Additionally, he suggests removing staked DAI boosters from the merit program starting from Merit Round 2 and subsequent rounds.