[ARFC] Risk Parameters for DAI Update

As Allez Labs shares its risk analysis on this proposal to set DAI LTV to 0, here is a recap of timelines and the reasons that have led to this proposal to mitigate DAI’s risks.


On March 21st BA Labs posted a risk assessment of Ethena and the integration with Morpho, the initial plan was to allocate 100M DAI across different (s)USDe collateral markets in Morpho Blue through the Spark DAI vault. On the same day Chainsecurity’s audit of the integration was published. The initial allocation was made on March 29th.

Collateral/LLTV 77% 86% 91.5% 94.5% Total
sUSDe 5M 10M 30M 5M 50M
USDe 5M 10M 30M 5M 50M

On March 21st, Block Tower made another proposal to directly purchase Ethena (s)USDe by reducing exposure to USDC and a legal assessment by Steakhouse Financial followed suit on March 28th.

On April 1st, BA Labs posted a second analysis regarding the Spark DAI vault and its allocation to (s)USDe backed markets, proposing the following parameters.

Source: Maker forum

With some pushback on the forum, after only a day of discussion the proposal was approved for voting, less than a week later, on April 7th 2024, the proposals passed:

  • increasing the credit line up to 1B DAI
  • approving a direct swap of 50M USDC to (s)USDe through Maker’s affiliated RWA entities

In practice, a 1/2 multisig of anons now has power to increase the credit line by 100M DAI every 24 hours up to 1B DAI. However as defined in Maker governance they act upon recommendations from the Stability Scope Advisor which is BA Labs who at this stage recommends a maximum allocation of 600M DAI.

Following the approval, on April 8th, a direct deposit into Morpho was triggered bringing the total assets of the Spark DAI vault on Morpho to 200M DAI.

Collateral/LLTV 77% 86% 91.5% 94.5% Total
sUSDe 10M 20M 30M 10M 70M
USDe 10M 80M 30M 10M 130M

Increasing the allocation into riskier markets (94.5%) and into the non yield bearing USDe, this is in line with the adopted end allocations (below).

Collateral/LLTV 77% 86% 91.5% 94.5% Total
sUSDe 10M 50M 30M 10M 100M
USDe 10M 330M 150M 10M 500M

The timelines and decision making processes around the gradual allocations ((100M DAI - accumulated interest) per) have not been laid out clearly.

Did Maker follow its collateral onboarding frameworks?

There are two collateral onboarding frameworks in Maker, [MIP6] and the Spark collateral onboarding framework. The allocations in (s)USDe collateral markets on Morpho falls under the second framework.

Maker’s collateral onboarding frameworks are centered around a profitability analysis, while they have no direct control over the rate at which DAI is borrowed in Morpho Markets, being the dominant and often only player in these markets they have lots of room to keep it in line with expectations in normal market conditions.

While the framework was not intended for the Ethena type of derivative it explicitly states that amendments can be made for projects that prove scalable demand, undoubtedly Ethena falls under that category.

  • (s)USDe has not been listed on blue chip lending markets for more than 2 months (Compound/Aave as per the collateral onboarding framework)
  • the average market cap of the circulating supply of sUSDe/USDe has not been over 1B for over 3 months
  • no secondary liquidity analysis has been conducted, the conclusions around the primary market are not commensurate with the investment made, indeed it is recognized that there are a lot of unknowns and unquantifiables.

Similarly, while it is unclear under which framework the direct purchase of (s)USDe falls there is a swath of concerning accommodations made.

Maker will deploy 50M USDC into Ethena through its RWA entities, with preferential conditions:

The analyses provided and allocation decisions

As we understand it, the rationale for making the allocation into (s)USDe collateral markets is that the risk is worth the reward. In our opinion the understanding of the risks and reward are not commensurate with the investment made.

On risk

The analysis posted on Maker’s forum is a thorough deep dive into Ethena’s risks and was as comprehensive as can be in listing them. However the conclusions around the primary market redemptions, custodian risk, LST and hedging risks are admitted to be unclear at best.

There has been a shift from getting exposure the funding rate towards gaining exposure to ENA:

The allocation decision in the first analysis is centered around where user profitability/lending efficiency lies within the different Morpho collateral markets by taking into account leverage and funding rates without considerations of risks. This analysis de facto does not include USDe markets as they are non-yielding. The second allocation recommendation (April 1st) was solely based on past pool performance without consideration of the underlying market structure and liquidation curves.

As of April 3rd USDe pools were the riskier pools across the whitelisted markets, their collateral is non yielding and users were paying the highest rates, yielding a concerning time to liquidation because of accumulated interest.

Spark DAI allocation (on April 3rd), assuming 30% funding rate

Market DAI Allocation Collateral at risk (-10% drop) Current borrow rate 6 day avg borrow rate Time to liquidation Time to liquidation (6d avg rate)
USDe 77% 5000000 1170000 46% 27% 11w 19w
USDe 86% 10000000 6800000 62% 32% 8w 16w
USDe 91.5% 30000000 29200000 108% 74% 5w 7w
USDe 94.5% 5000000 5160000 63% 44% 8w 11w
sUSDe 77% 5000000 1550000 50% 31% 26w >52w
sUSDe 86% 10000000 3510000 44% 34% 37w >52w
sUSDe 94.5% 5000000 3410000 52% 39% 23w >52w
sUSDe 91.5% 30000000 21180000 43% 51% 40w 24w

The borrowing demand in these no-yield collateral markets is a consequence of Ethena points program which is expected to last until September. Additionally there was an expectation that funding rates would go up and that Maker will allocate more in these markets and drive the borrow rates on these leveraged positions further down.

Despite USDe collateral markets being the riskiest to deploy into, the second allocation is heavily weighted towards them.

Collateral/LLTV 77% 86% 91.5% 94.5% Aggregate allocation
sUSDe 10M (+5M) 20M (+10M) 30M (+0M) 10M (+5M) 70M (+20M)
USDe 10M (+5M) 80M (+70M) 30M (+0M) 10M (+5M) 130M (+80M)

This shows a clear shift of Maker’s exposure from the funding rates towards the ENA points program.

The speed of this new allocation is unprecedented

At a higher level more allocation will be made into a new protocol - Morpho Blue - and new collateral - (s)USDe - at a faster pace than Spark’s original credit line using battle tested software. There is no doubt that this is concerning.

On rewards

Unlike in Maker core vaults or in Spark, Maker has no direct control over the rate at which DAI is borrowed in Morpho Markets, however being the dominant player in these markets they can keep rates in line with expectations in normal market conditions by dynamically supplying and withdrawing.

The recent reallocation to USDe though underscores that operationally there is not yet a commitment to at all times maintain the aggregate return of the Spark DAI vault in line with reasonable risk premia and well above the DSR as stated in the second risk analysis.

The integration with Morpho and allocation to (s)USDe collateral markets are publicly depicted to be about gaining exposure to the funding rate. In practice the allocation decisions and concentration into USDe markets instead of the yielding sUSDe markets shows a pivot from gaining exposure to the funding rate towards gaining exposure to the ENA token and its points program.

Analysis from Maker should be provided on the expected premiums and reallocation decisions in light of the recent shift of focus towards indirect ENA farming value capture.

Maker’s Balance Sheet Analysis

An aggregate view of Maker’s balance sheet (April 8th)

Collateral DAI (M) DAI % Backing Stability Fee Risk scoring (Allez Labs Risk Score)
RWA 2,075 42.64% 100% CR 3.70% Low
(st)ETH core vaults 890 18.29% 609% CR 13.40% Low
PSMs 590 12.12% 100% CR 0% Low
Spark (Aave instance) 920 18.91% NA 13.30% Medium
WBTC core vaults 191 3.93% 358% 14.70% Medium
Spark (Morpho) 200 4.11% 113+% CR Variable High
Total 4,866 100%

Source: Makerburn.com

Excluding the Morpho instance, Maker charges on average 7.42% for DAI borrows and yields 13% on 1.53B DAI that is locked in the DSR leaving ~3.16% ( 150M annualized ) for expenses, buybacks etc. While the allocation in Morpho is risky, given it’s less than 5% of Maker’s current balance sheet it does not meaningfully change DAI’s risk profile, however as time progresses and the allocation grows to $600M it will tend to become more and more risky reaching 11.3+% of DAI fixing other BS items.

Assuming most of the flow of DAI to USDe is through the PSM, users taking leverage on (s)USDe using DAI will progressively decrease Maker’s RWA exposure from current ~55+% to ~45-% exposure in favour of (s)USDe CDPs.

Users can use DEX liquidity available on Curve to take leverage on (s)USDe using DAI and liquidity in the DAI/USDe and sDAI/sUSDe pools has been growing and recently surpassed $75M.

(s)DAI/(s)USDe DEX liquidity
Source: Allez Labs on Dune

However the capital efficiency of the PSM is unmatched and already a few hours after the allocation there’s been significant outflows from PSM-USDC-A, - 41%USDC in the last 48h.

PSM USDC Balance
Source: Allez Labs on Dune

There are of course other user, cyclicality and market dynamics at play explaining this move, but users taking leverage on Ethena is a huge part of this and will only be more pronounced as the allocation continues to grow.

Source: Allez Labs on Dune (1), (2)

It’s reasonable to estimate that at full allocation (600M DAI), most of the liquidity used to take leverage will flow out of Maker’s RWA exposure. First flowing out of the PSM and later Maker will decrease its T-Bills exposure to replenish the PSM. Alternatively Maker and Ethena could work to ensure that there are enough incentives in size for DEX LPs to support the leveraging demand.

Similarly users deleveraging from (s)USDe are likely to go through the PSM and thus replenishing it over time.

While it is still early, borrowers in (s)USDe collateral markets on Morpho have not shown sensitivity to the cost of capital, this is likely to continue for the coming months. As a result the expected changes to Maker’s balance sheet are likely to sustain over that period with high risk DAI increasing from 4.1% to 17.6%


Whilst the introduction of Ethena as a collateral asset in the Maker ecosystem enhances Maker’s profitability, there is a mismatch between what is currently understood and the speed and size of this new allocation. As such, reasonable preventative measures should be taken on Aave while we continue to monitor the risks and Maker’s balance sheet.

DAI and sDAI in Aave

As pointed out there is north of 340M DAI/sDAI across Aave deployments, we do not think that completely offboarding either are commensurate measures to the recent changes in Maker’s risk profile, additionally for Aave to remain competitive we suggest treating DAI and sDAI differently.


As pointed out by @ChaosLabs DAI is mostly a borrow asset in Aave, maintaining it as a collateral asset only exposes Aave to tail risk events that are not compensated by the revenue it currently generates as collateral.

We are in support of any plan to transition DAI to become only a borrowable asset, i.e. decreasing slowly the LT. We suggest the LTV be set to 0 which does not affect existing users.


sDAI is a yield bearing asset used only as collateral on Aave, it is not a significant revenue generator for Aave. However updating its LT and LTV to be non competitive or as offboarding sDAI is not in the favor of a large portion of Aave’s user base as suggested by @WintermuteGovernance. As a measure of its significance: Aave V3 Ethereum is the second largest “holder” of sDAI next to the Gnosis bridge.

In our opinion, updating the sDAI parameters to become completely uncompetitive is not a productive route. Within a reasonable cap sDAI as collateral, the risks are diversified, and it does not significantly increase insolvency risk for Aave.

We suggest lowering the supply cap of sDAI to 65M on V3 Ethereum as we continue to monitor Maker’s balance sheet without changing its 80% LT and 77% LTV.

Moreover as precautionary measure and for consistency the sDAI oracle - which has been left out of the CAPO updates in light of the changes of its compounding rate - should be updated to use the capped price of DAI instead of the chainlink price as a source for DAI_TO_USD, cf sDAI oracle and DAI oracle.

On the proposed options

As a practical matter there is a live ARFC snapshot from Chaos Labs, sDAI being excluded from the snapshot we are in favor of Option 1 which intends to decrease DAI’s LT and LTV progressively.

Overall both will decrease the risk in Aave, however our opinion is a measured approach in reducing the LT is a better solution without a thorough analysis of the affected user positions.

Ultimately we believe the above stated measures, lowering the LTV and LT for DAI while decreasing the supply cap for sDAI provide the best balance between reducing risk for the Aave protocol while maintaining competitiveness.

In this analysis Allez Labs highlights recent changes to DAI’s risk profile, changes which are set to accelerate hence the proposed precautionary approach. This is not a condemnation of Ethena which does present significant risks but also equally significant opportunities of which we will share analyses soon.