Aave DAO Considers Changing Its Asset Listing Policy
December 5th, 2022

TLDR: Open source liquidity protocol Aave seeks to encourage user migration from Aave v2 by allowing new asset listings only on Aave v3.

The design for Aave v3 was first introduced in November of 2021. Among its most appealing features is that it presents more and better levers for controlling risk than previous versions of Aave’s DeFi platform. “Isolation mode,” for example, allows newly listed assets to be isolated with a specific debt ceiling and only permits the borrowing of certain assets. And v3 includes the possibility of adding “risk admins,” which are designated entities granted “the ability to alter certain risk parameters without requiring a governance vote.” This allows DAO risk managers such as Gauntlet and Chaos Labs to be both swiftly proactive and responsive to market conditions. Aave v3 is currently deployed on several chains, including Arbitrum, Avalanche, Optimism, and Polygon; however, it is not yet deployed on Ethereum itself — while Aave v2 is, which means that many users remain on v2. The “total market size” of Aave v2 on Ethereum mainnet is ~$4.7 billion at the time of writing.

The sunsetting of Aave v1 has been actively discussed on the Aave forums since late August, while discussions of the migration from Aave v2 to v3 (and the subsequent deprecation of v2) have been active since mid November of this year. But recent events — such as the collapse of several well-known exchanges and funds — have created much more volatile market conditions. And while DeFi — and Aave in particular — has weathered these storms admirably, a great deal of action has been required on the part of the DAO to minimize continuing risk. The attempted short squeeze of CRV on Aave in November, while largely unsuccessful, was an unnerving reminder that vulnerabilities remain, and vigilance is necessary. Gauntlet even went so far as to catalogue all the recent measures taken.

The Proposal: Aave DAO Policy Change

Several key players in the Aave DAO are now urging the community to find ways begin to close off the v1 and v2 markets so that usage of the much less risk prone Aave v3 will increase. Llama posted the following request for comment to the Aave forums on November 26, with support from Chaos Labs, Gauntlet, and others: “Aave DAO Policy Change: Halt Listings on all Aave v1 & v2 Non Permissioned Deployments.”

The request for comment posted by Llama in the Aave forums
The request for comment posted by Llama in the Aave forums

The crux of the proposal is that it “advocates only enabling future asset listings to occur on Aave v3 deployments”; if the proposal were to pass, no new assets could be added to Aave v2. This would effectively begin the transition from v2 to v3. Even though Aave v2 would remain fully supported for the foreseeable future, the idea is that Aave v3 grows as users move their assets to the more fully featured — and protected — deployments. A possible timeline with milestones for a complete transition to v3 is outlined in one of the forum posts referenced above, though it’s important to note that the community has not reached agreement on the approach described there.

“Successful passing of this ARFC will indicate the DAO has decided that the various v3 deployments are the future of the Aave DAO, and support of the various listed markets will be limited to Risk and Critical Technical Updates.”

Governance in Aave formally begins with a discussion in the forums, typically labelled as a “request for comment” (ARFC); if discussion leads to an agreed upon direction, the proposal moves either to a Snapshot vote or becomes an Aave Improvement Proposal (AIP) if an on-chain, smart-contract modification is needed. This proposal has been listed on Snapshot and voting is scheduled to begin on December 5.

The Bigger Picture

This proposal is important for Aave as it aims to create more efficiency, coordination, and alignment in the DAO as it positions itself to remain profitable, stable, and secure in a very challenging environment. Proposals coming from several DAO service providers over the last few weeks have shown that there are significantly different approaches to risk in the community. It is all well and good to have a diversity of outlooks, as long as they don’t lead to contradictory actions spread across different versions of the protocol. This proposal, which is put forward by those very service providers, aims to focus the DAO on the future of the protocol — Aave v3, which is designed to have much better risk controls. What we see here is the DAO of one of the leading DeFi protocols actively aligning itself on complex topics in order to ensure the health of the protocol.

We’ll be tracking this proposal activity closely at Boardroom, follow our newsletter to stay up to date. If you’re a voter in a protocol, make sure to check out Boardroom Portal. {{Brief11//aave}}

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