MakerDAO Cuts Off Its AAVE-DAI Direct Deposit Module

MakerDAO, builder of decentralized, collateralized stablecoin DAI, has turned off the DAI Direct Deposit Module (D3M) as of June 17 21:04 UTC, following the passage of a governance vote on June 15.

D3M was created in cooperation with the Aave team and introduced in April 2021. According to Sam from the MakerDAO smart contracts team (@hexonaut), the module allows the Maker protocol “to enforce a maximum variable borrow rate for the DAI market on Aave.”

The Maker Protocol has now set its maximum borrow rate to 0 temporarily. With a borrow rate of 0, the Aave D3M module is turned off and will not mint fresh DAI into Aave’s lending market.

On June 14, DeFi platform Aave put forward a proposal intended to “mitigate risk to Aave [version 2] markets relating to the price deviation of stETH/ETH.” The proposal aimed to freeze the stETH market, increase the liquidation threshold for stETH to 90% and pause ETH borrowing.

Aave’s current liquidation threshold (LT) for stETH is 81%, which was recently increased on May 19. The change to increase the LT level of stETH was accompanied by Aave governance freezing UST on Aave v2 and decreasing loan-to-value (LTV) on stETH to 69%.

The team at financial modeling platform Gauntlet initiated the Aave proposal. In it, they said, “[Aave’s] current market liquidity is very likely sufficient to handle expected liquidations in the protocol and no immediate parameter changes or risk mitigations are necessary.” But in the midst of current crypto market conditions, the measure was meant to provide extra precaution for Aave’s decentralized finance (DeFi) platform in preventing a liquidation spiral.

In response to Aave’s proposal, however, Maker’s Risk Core Unit (RISK-001) initiated a proposal to temporarily disable the Aave DAI Direct Deposit Module, effective today, June 17. The Risk Core Unit described Aave’s governance proposal to increase the liquidation threshold for stETH to 90% as an “unacceptable risk to the Maker Protocol.”

The proposal states: “The AAVE-DAI pool currently has enough reserves right now for MakerDAO to withdraw. If the DAI reserves become empty, any periodic DAI repayments from other borrowers will be snatched quickly by bots and a protocol like MakerDAO will be locked-in for a long time.”

Primoz, a Maker Core Unit Facilitator and part of the Risk Core Unit Team, said that “the reason we believe this is risky is because out of 200 [million] DAI borrowed on Aave Ethereum v2, 100m DAI is being borrowed by Celsius and collateralized mostly by stETH.”

Celsius, the interest-earning yield platform that reported $11.8 billion in assets under management and $8.2 billion in loans as of May 17, 2022 has frozen withdrawals on June 12 and is facing proliferating rumors of insolvency.

“Contagion risks in DeFi are increasing,” Primoz said in an explanation posted to the Maker Forum. “You simply want to cut exposure in such times because there are so many unknown risks (Tether being a shareholder of Celsius comes next to mind). We could be dealing with Lehman’s moment in crypto. And everyone is probably overreacting but this makes risks even more severe.”

He went on to point out that “the beauty of D3M is that we can react in time unlike with other vaults so we can turn it off instantly.”

Even though Aave’s proposal was ultimately rejected earlier today, the D3M has still been disabled, at least temporarily. There will be a meeting convened in two weeks to discuss reactivating the module in the future.