Chaos Labs, the risk management contractor for AaveDAO, has proposed a 12% reduction in the Dai loan-to-value ratio (LTV) amid ongoing deliberations within the decentralized autonomous organization (DAO) regarding limits on Dai collateral. This proposition comes in response to a recent minting of $600 million Dai, partially backed by eUSD, prompting discussions on risk management strategies.

The Aave platform operates as a crypto lending protocol across multiple blockchain networks, allowing users to borrow one cryptocurrency while staking another as collateral. Governance of the platform is overseen by holders of the Aave token, collectively forming AaveDAO. Dai, an algorithmic stablecoin, is backed by various forms of crypto collateral, including USDC and Ethereum, and is issued by the Maker protocol, governed by MakerDAO.

The recent minting of 600 million Dai and its deposit into a vault with the decentralized lending protocol Morpho drew criticism on the AaveDAO forums. While MakerDAO asserts that the newly minted Dai will be backed by stable collateral through deposits of stablecoin eUSD into the Morpho protocol, critics argue that eUSD poses risks as collateral due to its association with uncertain assets.

In response to these concerns, various proposals have been put forth within the AaveDAO. A proposal by Aave Chan initiative founder Marc Zeller suggests a drastic 75% reduction in the Dai LTV, effectively prohibiting Dai from being used as collateral for new loans. Meanwhile, Chaos Labs' proposal recommends a more moderate 12% reduction in LTV, aiming to address the perceived increased risk while still allowing Dai to be used as collateral.

The debate revolves around the nature of stablecoin eUSD, issued by the Ethena protocol. According to Ethena documents, eUSD is backed by a combination of Lido Staked Ether (stETH) and corresponding futures short positions, intended to maintain a stable value regardless of fluctuations in the price of Ethereum (ETH). Despite claims of delta neutrality, critics argue that eUSD could become under-collateralized in certain market conditions, posing risks to the stability of the protocol.

The ongoing discussions within the AaveDAO involve key stakeholders, including representatives from MakerDAO, Ethene, and Morpho, aiming to address concerns surrounding the use of Dai as collateral and mitigate potential risks to the Aave platform. However, no formal vote has been scheduled to date, indicating that deliberations are still underway as stakeholders seek to reach consensus on appropriate risk management measures.