Overview
This analysis evaluates the collateral usage of USDS and DAI across Aave markets and finds that both assets provide limited economic value in their current configuration. Their use as collateral is minimal and does not generate meaningful borrowing activity or revenue for the protocol. In light of this imbalance between risk and contribution, we recommend disabling their collateral functionality across all instances where they remain enabled.
The analysis also reviews supply and borrow caps and provides updated recommendations that better reflect observed market usage and risk considerations. In addition, it evaluates the impact of increasing the USDS Reserve Factor and the configuration of USDS within E-modes, aligning the parameter set with the realized usage profile and revenue contribution of the asset.
Rationale
USDS and DAI show very limited usage as collateral across Aave markets. Their presence as collateral does not create meaningful borrowing demand and therefore generates negligible revenue for the protocol. In addition, on several chains, these assets have become relatively illiquid, diminishing via DAI’s effective legacy status. Maintaining collateral eligibility in this context introduces risk that is not justified by the minimal economic value these assets contribute.
| Asset | Instance | Aggregate Collateral Utilization | Estimated Annual Revenue (@5% Yearly Borrow Rate) | % of Total Supply Used as Collateral |
|---|---|---|---|---|
| DAI | Optimism | $45,796 | $176 | 4.13% |
| DAI | Polygon | $174,030 | $670 | 3.18% |
| DAI.e | Avalanche | $163,020 | $628 | 3.30% |
| DAI | Arbitrum | $203,117 | $782 | 3.01% |
| DAI | Ethereum Core | $943,503 | $3,632 | 0.59% |
| USDS | Ethereum Core | $8.88M (70% PYUSD) | $34,663 | 18.04% |
| m.DAI | Metis | $1,980 | $8 | 5.89% |
Given this imbalance between risk and reward, it is appropriate to disable their collateral functionality. This adjustment reduces unnecessary collateral-related exposure without affecting meaningful protocol activity or revenue generation.
At the same time, USDS continues to generate borrow-driven revenue on Ethereum Core and, to a much smaller extent, on Ethereum Prime. Parameter changes on the revenue side, particularly the Reserve Factor, can therefore improve the protocol’s compensation.
Reserve Factor Adjustment for USDS
USDS currently operates with a Reserve Factor of 10% on its primary instances, whereas DAI is configured at 25% across all its deployed instances.
Over approximately the last three months, the realised utilisation and rate environment of the main USDS pools can be summarised as follows.
| Instance | Period | Average Utilization | Average Borrow APR | Average Supply APR (RF = 10%) |
|---|---|---|---|---|
| Ethereum Core (USDS) | Last 3 months | 53.6% | 6.12% | 2.93% |
| Ethereum Prime (USDS) | Last 3 months | 78.6% | 6.52% | 4.76% |
Holding realised utilisation and borrow rates constant and only adjusting the Reserve Factor from 10% to 25% therefore produces a mechanical reduction in USDS supply APR and a corresponding increase in protocol revenue.
Over the same three-month window, the impact of such a change is:
| Instance | Average Supply APR (RF = 10%) | Projected Average Supply APR (RF = 25%) | Annualized Protocol Revenue at RF = 10% | Annualized Protocol Revenue at RF = 25% |
|---|---|---|---|---|
| Ethereum Core (USDS) | 2.93% | 2.48% | ≈ $216k | ≈ $539k |
| Ethereum Prime (USDS) | 4.76% | 3.97% | ≈ $10.9k | ≈ $27.3k |
Given the recent increase in complexity of the underlying backing of DAI and USDS, and given current configuration, USDS leaves a meaningful amount of interest margin uncaptured by the protocol. As such, Chaos Labs supports an increase in the Reserve Factor.
E-mode Configuration for USDS
USDS does not function as collateral inside its most commonly used E-modes and it is exclusively used as a borrowed asset, primarily to leverage yield strategies. On Ethereum Core, the dominant use of USDS within E-Mode is as debt against USDe and sUSDe within Ethena-related E-mode, where users borrow USDS to increase exposure to the Ethena yield. This corresponds to approximately 4.12m USDS borrowed, or 30% of the outstanding USDS debt, with the remaining 70% sitting outside them.
Maintaining USDS as a borrow-only asset within these E-modes does not create additional tail-risk pathways for Aave relative to treating it as a standard borrowable asset outside E-modes. However, if the DAO wishes to remove USDS from E-modes as part of a broader initiative, such a change can be implemented without creating risk concerns, as it would not affect collateral risk nor introduce liquidity stress in the USDS market.
Supply and Borrow Caps
This analysis also reviews supply and borrow caps for USDS and DAI across Aave markets. The recommended adjustments reflect the usage of the asset and align supply and borrow limits with observed demand and risk considerations.
Specification
| Instance | Asset | Current Max LTV | Recommended Max LTV |
|---|---|---|---|
| Optimism | DAI | 63% | 0% |
| Polygon | DAI | 63% | 0% |
| Avalanche | DAI.e | 63% | 0% |
| Arbitrum | DAI | 63% | 0% |
| Ethereum Core | DAI | 63% | 0% |
| Ethereum Core | USDS | 75% | 0% |
| Metis | m.DAI | 63% | 0% |
| Asset | Chain | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap | Current RF | Recommended RF |
|---|---|---|---|---|---|---|---|
| USDS | Ethereum Core | 800,000,000 | 160,000,000 | 360,000,000 | 144,000,000 | 10% | 25% |
| USDS | Ethereum Prime | 200,000,000 | 40,000,000 | 180,000,000 | 36,000,000 | 10% | 25% |
| DAI | Ethereum Core | 338,000,000 | 200,000,000 | 271,000,000 | 180,000,000 | - | - |
| DAI | OP Mainnet | 10,000,000 | 2,000,000 | 7,000,000 | 1,800,000 | - | - |
| m.DAI | Metis | 1,000,000 | 200,000 | 900,000 | 180,000 | - | - |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
Copyright
Copyright and related rights waived via CC0