[ARFC] Aave and ether.fi Cash: A Proposal for Real-World Utility

Governance
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[ARFC] Aave and ether.fi Cash: A Proposal for Real-World Utility

Author: ACI & Ether.fi

Date: 2025-04-29

Overview

This proposal outlines a partnership between Aave and ether.fi, with the goal of creating a unique Aave market on an EVM L2 to facilitate on-chain credit for everyday payments through the ether.fi Cash credit card program. This collaboration aims to benefit both platforms by continuing to expand their user bases and driving innovation in DeFi with a focus on bridging the gap between DeFi and real-world consumer applications.

Proposal is submitted after successful [TEMP CHECK] Aave and ether.fi Cash: A Proposal for Real-World Utility and TEMP CHECK Snapshot.

Summary

The ether.fi market was launched on Aave back in September, with the goal of laying the groundwork for a unique instance of Aave, focused at stablecoin borrowing against interest accruing collateral. This market has since been idle, while the development of ether.fi Cash continued to take shape.

As we prepare for the next phase of the rollout plan, we propose migration of this market to an optimized Layer 2 market designed specifically for consumer credit applications. Since then, it was determined that ether.fi needs a more tailored instance of the Aave market, with the focus of allowing for more flexibility in asset listings and parameters, along with less expensive transaction fees. This market will feature tailored parameters and asset listings optimized for real-world spending, supported by a competitive card program offering up to 3% cashback.

Motivation

The traditional credit card industry continues to charge excessive interest rates (often 20%+). By leveraging collateral assets that permit users to continuously earn interest on the positions held in their wallets, naturally offsetting borrowing costs. This market will create a virtuous cycle where a user’s digital assets work to pay down their credit. With this, we can provide users with:

  • Significantly lower borrowing costs compared to traditional credit cards
  • Competitive rewards (up to 3% cashback)
  • Efficient use of interest bearing asset positions as collateral, allowing users to keep their positions on chain and in their own custody
  • Minimal transaction costs through L2 deployment

This proposal continues to build on the fundamental differences that DeFi has to offer. The future of ether.fi cash will be a system that provides both retail and corporate users with a truly native on-chain solution that does not sacrifice any of the features that consumers have become accustomed to with everyday spending.

Card Program

The ether.fi Cash credit card is set to change everyday spending by bringing self custodied DeFi-powered credit to the world’s largest payment network. With universal acceptance at over 80 million merchants globally, users can access their DeFi credit lines for daily purchases while earning cashback rewards on all expenditures. The upcoming neo-banking alternative mobile app, launching in early Q2 2025, will evolve to provide a comprehensive suite of financial tools including real-time transaction monitoring, expense categorization, budget tracking, and intelligent position management. Corporates and retail users can instantly create multiple virtual cards, manage spending limits, and track rewards - all while their collateral works for them in the background through the Aave market. The app would integrate directly with the custom Aave instance, offering automated position management, smart liquidation protection, and dynamic credit line adjustments based on collateral value. Capital efficiency in this market will be further realized with the launch of Aave V4, utilizing available stable liquidity through the hub and spoke model.

By Q4, the platform plans to incorporate AI-powered trading strategies and financial insights, along with predictive budgeting tools, completing the vision of a truly on-chain banking alternative experience powered by DeFi. This will allow for a complete reimagining of on-chain credit, where the efficiency of DeFi meets the convenience of traditional payment networks, all optimized through a dedicated L2 deployment for minimal transaction costs. This vision will be coupled with the battle tested Aave market, along with risk monitoring provided by Chaos Labs.

Through this vision, ether.fi would also look to collaborate with Aave to offer a unique co-branded credit card for a unique set of users.

Implementation details & profit share

We believe in strategic partnerships that are built for sustainable growth and fair value distribution. That’s why we’re proposing a straightforward revenue sharing model where 15% of the interest rate spread goes directly to the Aave DAO. This creates a win-win scenario where protocol growth directly benefits both ecosystems.

  • For the initial 6 months, 20% of the interest rate spread allocated to Aave DAO
  • After the initial 6 months, 15% of the interest rate spread allocated to Aave DAO
  • Transparent revenue distribution mechanism
  • Quarterly reporting on market performance and revenue generation

This will allow for scalable infrastructure that is ready for mass adoption.

Implementation Timeline

  1. Q2 2025: L2 market deployment with defined assets supported
  2. Early Q2 2025: Card program launch to public (currently in closed beta)
  3. Q3 2025: Enhanced features rollout
  4. Q4 2025: Program optimization based on usage data

Disclaimer

This proposal is powered by Skywards. ACI is not directly affiliated with ether.fi and did not receive compensation for creating this proposal.

Next Steps

  1. Publication of a standard ARFC (done)
  2. Collect community & service providers feedback before escalating proposal to ARFC snapshot stage
  3. If the ARFC snapshot outcome is YAE, publish an AIP vote for final confirmation and enforcement of the proposal.

Copyright

Copyright and related rights waived under CC0

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To support informed business-level decision-making, we have consolidated and articulated our legal assessment of the Cash product’s contractual architecture. Our team undertook a detailed, clause-by-clause comparison of the three operative Ether-fi Cash agreements (Cardholder Agreement (U.S.), Cardholder Agreement (International), Corporate Agreement (International)) that govern the current and prospective customer cohorts.

The key findings from our screening are summarized below. Our initial analysis indicates no legal or regulatory concerns with the product’s setup. Therefore, we recommend continuing to explore the integration process, deeming that it poses no incremental regulatory risk to Aave’s DAO. As further integration details are published, we will conduct additional research to provide targeted risk recommendations.

1. Counterparty Scope

  • U.S. Cardholder (consumer): Applies to natural persons who qualify as U.S. persons and successfully complete full KYC. The contract is governed by the laws of Puerto Rico and, subsidiarily, U.S. federal law, with all disputes submitted to AAA arbitration seated in New York.
  • International Cardholder (consumer): Covers retail users situated outside the United States who must affirm they are not U.S. persons and pass sanctions screening. Governing-law and venue clauses likewise reference Puerto Rico; arbitral forum remains AAA.
  • International Corporate: Addresses non-U.S./non-Canadian legal entities that satisfy KYB requirements. Disputes are referred to LCIA arbitration, seated in the Cayman Islands and governed by Cayman Islands law.

2. Funding Mechanics and Interest Terms

  • U.S. & International consumers: Each purchase is matched 1:1 with digital-asset collateral on deposit, creating an over-collateralised revolving line. The smart contract liquidates automatically on default or margin breach. Purchases accrue no interest, and cash-advance functionality is expressly excluded.
  • International corporate: Companies may (i) pre-fund in USDC or (ii) draw on a crypto-collateralised facility subject to adjustable minimum ratios. A dashboard provides real-time margin-call alerts. No APR is quoted; instead, the arrangement is framed as non-custodial and fee-based.

3. Liquidation Triggers and Process

  • U.S. consumer: A “Liquidation Event” is triggered by any of the following: (a) scheduled periodic sweep; (b) a discretionary sweep within a fixed number of hours after each purchase; (c) non-payment 21 days post-statement due date; or (d) collateral value falling below outstanding charges without timely top-up. Once initiated, the smart contract forecloses automatically, and Ether-fi disclaims any obligation to halt or give prior notice.
  • International consumer: The cardholder terms do not enumerate triggers; liquidation is governed by the underlying DeFi lending protocol, which executes when its LTV threshold is exceeded. Ether-fi’s role is limited to charging a contractual liquidation fee; it is not the seller of collateral.
  • Corporate: If collateral falls below the stipulated ratio and is not cured, Ether-fi may unilaterally adjust requirements and liquidate. Precise triggers are configurable. Liquidation may occur via the smart contract or a third-party venue designated by Ether-fi after a margin breach.

4. Fee Schedule

  • Foreign-transaction fee: A 1 % surcharge applies to every non-USD or cross-border purchase on both consumer cards. Corporate fees—including onboarding, issuance, foreign-exchange, and other charges—are prescribed in a separate in-dashboard schedule.
  • Late and penalty fees: The U.S. consumer agreement imposes a 2 % fee on any past-due balance. International consumer fees are deferred to the applicable schedule. Corporate terms authorise a broader spectrum of fees and collateral liquidation upon default.

5. Spending Limits and Administrative Controls

  • Consumer (U.S. & International): Spending limits are dynamic, calibrated against posted collateral and real-time risk indicators.
  • Corporate: Default limits are risk-weighted, but Program Administrators can configure granular controls—per card, business unit, or time window—through the administration dashboard.

6. Liability Allocation and Consumer-Protection Safeguards

  • U.S. consumer: Liability for unauthorised use is capped at $50 upon prompt notification, mirroring Regulation Z and Visa’s zero-liability framework.
  • Corporate: Liability resides entirely with the company. Internal corporate policies may redistribute losses among individual users, yet Ether-fi Cash ultimately looks to the corporate entity for restitution.

7. Customer Due-Diligence Requirements

  • U.S. consumer: Full KYC - Social Security number, residential address, and OFAC screening.
  • International consumer: KYC plus explicit non-U.S. attestation and sanctions screening.
  • Corporate: KYB covering formation documents and beneficial-owner identification, supplemented by KYC for every authorised card user. The Program Administrator manages keys and spending parameters.

8. Governing Law and Dispute Resolution

  • U.S. consumer: Puerto Rico law (with applicable U.S. federal overlay); AAA arbitration seated in New York or conducted remotely.
  • International consumer: Puerto Rico law; AAA arbitration seated in New York or remote.
  • Corporate: Cayman Islands law; LCIA arbitration seated in the Cayman Islands.

9. Organisational Structure and Risk Segmentation

Ether .fi SEZC, a Cayman-registered entity, owns the Ether-fi protocol, licenses the “ether.fi” brand, controls the website, and stands as the counter-party under the overarching Terms-of-Use as well as the data-controller for privacy purposes. Two wholly-owned subsidiaries—Ether .fi Cash Ltd (consumer) and Ether .fi Cash [Corporate] Ltd—administer the respective Cash credit-card programmes, including collateral parameters, spend limits, and cardholder contracts. The issuing bank, operating under the Visa licence, is legally distinct from all Ether-fi entities. Each card agreement incorporates the parent’s Terms-of-Use, thereby situating Ether .fi SEZC at the apex of the contractual stack while allowing the Cash subsidiaries to manage card-specific operations and risk.

This tripartite structure intentionally (i) separates regulated card-issuing activities from unregulated crypto operations, (ii) isolates liability across jurisdictions, and (iii) establishes a compliance firewall between traditional banking and DeFi functionality. The agreements underscore this demarcation, noting, for example: “Issuer is not a party to any agreement with the Ether-fi protocol” and “Issuer bears no affiliation to, or liability for, any interaction between you and the Ether-fi protocol.”

10. DeFi Integration as the Credit Engine

The card programs interface directly with decentralized lending pools to furnish users with an over-collateralized USDC revolving line. Because credit is extended by—or through—the DeFi protocol (i.e. Aave in the examined proposal) rather than by the Visa issuer, regulatory obligations bifurcate: front-end purchase transactions remain subject to conventional card-network rules, while KYC/AML and credit-risk oversight migrate to Ether-fi Cash. The three agreements delineate that boundary as follows:

  • U.S. consumer: Ether-fi Cash Ltd is expressly the creditor of record; the Visa issuer disclaims lender status. Collateral is foreclosed automatically upon any of four stipulated triggers.
  • International consumer: The issuer functions solely as card issuer. LTV monitoring, interest computation, and liquidation are executed by the underlying protocol, while the card terms merely reserve a “Liquidation Fee (Reserved).”
  • Corporate: A company may either pre-fund in USDC or pledge crypto collateral to secure a flexible credit line visible in its admin dashboard. Collateral ratios and liquidation parameters remain subject to modification by Ether-fi Cash upon notice.

Conclusion

Taken together, these provisions articulate a sophisticated hybrid model that combines old card systems with new, decentralized money sources, and divides legal risks among different entities and regions.

In light of the foregoing, we consider the Cash product’s legal and compliance architecture sufficiently robust and well-segmented across the relevant entities and jurisdictions. The proposed use of Aave liquidity pools functions strictly as a modular funding conduit within Ether.fi Cash’s credit workflow; it neither transfers nor expands liabilities, fiduciary obligations, supervisory duties, or other regulatory burdens onto the Aave protocol or its governance participants.

Accordingly, we discern no incremental compliance exposure for Aave and are supportive of proceeding with the integration, subject to the continued maintenance of the controls and safeguards outlined above.

1 Like
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Hello,

is this considered a whitelable instance like Horizon and WLFI or this is an Aave market maintained by the DAO but only tailored to fit Ether.fi business model?
What is being covered by whom?
I would like to point to this proposal from me [ARFC] Strategic Opportunity Framework for Friendly Forks and Whitelabel Instances

Because I do think we are in a situation where we do need a framework that is not only clear on revenue sharing but also on responsibilites for a new market, depending on what it is going to be exactly.
I assume that other SP probably have similiar questions as like I said, depending on what this exactly is going to be, they need to support it or now. Which will take ressources from these teams, slowing down other relevant tasks within the DAO.
My point is that we need to define clear rules on how to proceed with proposals like this in order to let everyone know what this means for their daily business and where and how the DAO benefits from this, or if its even beneficial.

In terms or numbers, can ACI or someone from Ether.fi give the DAO numbers on what they expect the potential revenue could be? This is important as this is the most important number for us, if the market in the end would be at a net loss for the DAO, because of operational work from SP then I would vote against the market. We already have several markets that are at loss for the DAO but need to be maintained in terms of risk, security and simply management.

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We’re overall very much in favour of such a use case and it’s good to know @LlamaRisk that there are no regulatory issues with the implementation.

@EzR3aL’s point is also fair - we need to know the projected revenue and how EtherFi plans to roll out the card, what the uptake is, etc., how exactly Aave will be marketed to users, and what the likely usage is. In a vacuum, the idea is very strong, but its success depends on granular implementation details which would be good to get more of an insight on.