MakerDAO has voted to cut off lending platform Aave’s ability to generate DAI for its unsecured lending pool as risks of the Celsius liquidity crisis loom over the entire crypto ecosystem.
The decentralized autonomous organization (DAO) made the decision as a means of mitigating the Maker protocol’s exposure to the beleaguered staking and lending platform in case Celsius collapses and implodes the stETH peg as well.
stETH is a token that represents an amount of ETH that is staked on the Lido staking platform. Its peg to ETH has been wavering for several weeks and is currently trading around 6% below the price of ETH. Celsius invested a significant amount of user funds in stETH, which is reportedly one of the reasons it stopped withdrawals.
Maker Governance has voted to temporarily disable the @AaveAave DAI Direct Deposit Module (D3M).
This change is available for execution on June 17, 2022 at 21:03 UTC.
— Creator (@MakerDAO) June 15, 2022
A June 14 governance proposal from DAO member prose11 suggested that the Maker protocol should temporarily disable the DAI direct deposit module (D3M) for Aave because Celsius borrowed 100 million in DAI collateralized by stETH, which would be at risk of liquidation. if Celsius fails.
“The reason we think this is risky is because of the 200M DAI borrowed on Aave Ethereum v2, Celsius borrows 100M DAI and it is mostly collateralized by stETH.”
The D3M allows Aave to stabilize interest rates on DAI loans by providing access to liquidity when needed. Aave’s D3M consists of 200 million DAI, 100 million of which have been loaned by Celsius.
If Celsius crashes, it could sell its stETH to meet retail liabilities and settle into Aave, likely forcing stETH to decouple further. This would put the Maker protocol at risk of not being able to recover all of the borrowed Celsius DAIs.
About 58% of the 83 voters on the proposal felt that the tail risk presented by Celsius was greater than Aave’s lost revenue by passing the proposal. The pause will take effect at 5:03 pm ET on June 17.
Related: BitBoy founder threatens class action lawsuit against Celsius
A separate governance proposal on Aave was submitted on June 14 to determine whether it should freeze stETH, pause ETH lending, and raise the liquidation threshold for stETH borrowers. However, opponents have a huge lead on this proposal with nearly 90% of the vote at the time of this writing.
The Maker movement is an example of decentralized finance (DeFi) protocols watching for contagion in the ecosystem and trying to protect themselves from being labeled. In addition to Celsius, crypto investment firm Three Arrows Capital is now feeling the effects of the contagion and threatening to spread it further, with reports of a $400 million liquidation and its inability to meet margin calls.
This post Maker cuts off Aave’s DAI supply as Celsius fallout continues
was published first on https://cointelegraph.com/news/maker-cuts-off-aave-s-dai-supply-as-fallout-from-celsius-continues