Aave Proposal to Peg Ethena’s USDe to USDT Sparks Community Pushback

February 4, 2025February 7, 2025 moneymetrics.org_admin Cryptocurrency

Table of Contents

Introduction

A recent proposal submitted by Chaos Labs and LlamaRisk on January 3 has sparked controversy among Aave users. The proposal, which aims to hardcode the price of Ethena’s synthetic dollar stablecoin (USDe) to match Tether’s USDt in Aave’s pricing feeds, has raised concerns about its potential impact on the protocol’s stability and user exposure.

Why Peg USDE to USDT?

Aave is currently using Chainlink’s USDe/USD price feed to value staked USDe (sUSDe), a staked version of USDE. According to the proposal, a 5% drop in USDE’s price could put over $300 million worth of USDE-backed loans on Aave at risk of liquidation. This could trigger collateral sell-offs to repay outstanding debt.

"To mitigate the risk associated with a USDe depeg event, we propose hardcoding USDe’s price to USDT," the authors stated.

The proposal argues that by linking USDe’s value directly to USDt, they can ensure seamless integration and avoid disruptions caused by transient price fluctuations in USDE. This would align the sUSDe oracle with USDt pricing, providing a more stable and reliable source of value for Aave users.

Community Backlash

However, not everyone is convinced that this approach is the best solution. Some Aave users have expressed skepticism about the proposal, questioning whether it addresses fundamental risks associated with USDE.

"A hardcoding the USDe price to USDT price sounds a bit risky given USDe isn’t really intended to be a stablecoin," user Hazbobo pointed out. "What’re the edge case risks involved? What’s the worst-case scenario?"

Another community member, ElliotNess, criticized the proposal for failing to address underlying risk factors:

"This is a disappointingly low-quality ARFC from two service providers without digging into any potential conflicts… Frankly, this can be said of every non-hardcoded asset listed on the Aave protocol," they noted.

ElliotNess questioned the rationale behind pegging USDE to USDT, suggesting that if Aave plans to hardcode USDe’s price, it might as well peg it directly to $1.00 to avoid secondary market price deviations entirely.

Potential Risks and Consequences

While the proposal aims to mitigate risks associated with USDE depeg events, some critics argue that it may introduce new risks and complexities.

For instance, if Aave hardcodes USDe’s price to USDt, what happens when there are significant price differences between the two assets? Would Aave need to implement additional mechanisms to adjust for these discrepancies?

Moreover, by pegging USDE to a fiat-backed stablecoin like USDt, Ethena may inadvertently create a new set of dependencies and potential points of failure.

The Role of Ethena in Aave’s Governance

Ethena is the creator of USDe, and LlamaRisk is part of Ethena’s risk committee. This raises questions about potential conflicts of interest and the motivations behind the proposal.

While the authors claim that their intention is to protect Aave users from exposure to secondary market fluctuations, some critics argue that this proposal may be driven by self-interest rather than a genuine concern for user safety.

Conclusion

The proposed hardcoding of USDe’s price to USDt in Aave’s pricing feeds has sparked intense debate among Aave users. While the authors argue that this approach will mitigate risks associated with USDE depeg events, critics raise concerns about its potential impact on the protocol’s stability and user exposure.

As the proposal is still in its early discussion stage, it remains to be seen whether it will gain traction or face rejection from the Aave community. However, one thing is clear: this debate highlights the complexities and challenges associated with decentralized finance (DeFi) protocols like Aave.