Aave's decentralized autonomous organization (DAO) is considering a proposal to join the Lido Alliance and establish a specialized market for the staked Ethereum (stETH) token of the liquid staking protocol.

The Lido Alliance focuses on developing infrastructure for stETH, particularly for restaking applications, in response to the growing influence of EigenLayer, an innovative Ethereum restaking protocol that has made significant waves since its launch last year.

Reasons for Aave's interest in the Lido Alliance include enhancing the user experience for wstETH holders and maintaining Aave as the preferred platform for Lido users. The initiative aims to enable Aave's main v3 instance to adopt a more aggressive approach, allowing borrowers to offer higher rates for WETH without impacting long-term users adversely.

Moreover, establishing a dedicated market is expected to attract new WETH inflows from Lido and potential Merit incentives. According to the Aave Chan Initiative, this move would solidify Aave's position as the top choice for wstETH transactions, improve borrowing economics for WETH users and the DAO, and stimulate inflows through risk-isolated assets. Ultimately, this strategy aims to grow Aave's Total Value Locked (TVL), market share, and revenues over the long term.

The proposal outlines that the borrowing capacity of WETH on V3 will initially be set at 90% of the supplied WETH, with ongoing adjustments managed by the risk steward to ensure consistent profitability for both stETH and WETH transactions. Additionally, the High-Efficiency Mode (E-Mode) is expected to be highly efficient, boasting around 50 basis points.

Support for this initiative within the Aave community is robust, with a preliminary temperature check conducted last week receiving approval. Following the community vote, Aave founder Stani Kulechov commented on the imminent launch of the first tailored Aave market for Lido, emphasizing that Aave v3's flexibility allows for customized risk configurations to meet specific needs.