Idea: Give depositors the choice to disable lending of the assets they deposit on aave
Context:
The current state of things on aave is that deposits are automatically made available for lending. (for the assets that are accepted as collateral). I believe that for certain assets, especially for wBTC and ETH, users are not depositing on aave to lend out their assets, but only for the ability to borrow against them. For example, the deposit APY on aave for wBTC is of 0.06%, so it seems very unlikely that users are depositing their wBTC on aave in the goal to gain that 0.06% APY. For those users, the fact that their bitcoin is available for lending or actively being lent out might represent additionnal risk that they do not want to take on. The deposit APY on wBTC is probably also artificially low on wBTC because all depositors are automatically having their wBTC made available for lending.
Possible positive effects:
It’s possible that removing this risk for users that do not want to take it would drive higher demand for borrowing on aave with BTC or ETH collateral.
If most depositors chose not to enable lending unless the deposit rate is below 1% APY for example, this could push up the deposit APY to a rate more reasonable like 1% and create a new market for people that actually just want to lend out their bitcoin, not borrow against it.
Fundamentally, I also believe it makes sense to give depositors the choice to control what happens with their assets.
I don’t know why no one ever came up with such an idea. This is brilliant and would be so good tbh. I mean like you said, they probably don’t want to lend anything but just borrow against some assets. Also I think for some kind of tax purposes this would be really helpful as one action won’t happen, the lending which is, for example in Germany kind of bad because then you have to hodl 10 years to be tax free. With an implementation like this, that wouldn’t happen. Really into this feature. Nice that you came up with that.
I entirety agree and support giving depositors the choice to lend their assets or not. Provides more risk management to users and can even raise the yield on common collateral types. I don’t see much of a downside and it’s something I’ve wanted for a while so I could use my LINK as collateral without giving liquidity to short positions. The 0.01% yield on LINK is simply not worth the risk of lending in my opinion.
I think the ideal implementation for the protocol would be to lend deposits by default, promoting liquidity, while allowing users to opt-out and disable lending for their address. I am not sure how this would affect aTokens from a technical perspective, but I imagine the balance could be fixed to a static amount. So the determination if a deposit is lent or not would be a on an address by address basis, keeping the fungibility and flexibility of aTokens.
Following up on this, I still believe this is a much needed feature for both greater risk management of collateral funds and the ability to opt-out of giving shorts liquidity (which would give a higher yield to those who choose not to opt-out), In my opinion this proposal seems like a win-win for all collateral depositors.
This is as others mentioned, a great way to help users expand the manage of risks.
In turn, it will allow more individuals who did not like the options available to participate on AAVE. Growing the protocol! Agree with all sentiments so far.
Want to bump this up as well - although it could lower liquidity and increase interest rates for borrowers (lowering # of borrowers and fees), it’s an option that should be provided for depositors so they can better control their own risk management.
I think these are the types of decisions that allow Aave to increase its resiliency in the long run and stand out compared to other lending platforms.
I believe this would have very negative implications for the TVL on the lending side and for the overall security of AAVE.
Huge amounts of collateral can disappear incredibly fast and probably will if the feature gets implemented. What does this do to the borrowers side?
Now it’s different. Most lenders have a borrowing position. And removing your collateral requires you to repay your borrow. Collateral can’t disappear fast.
I believe simulations need to be run to understand this feature better. I tend to think it would break the protocol. For now I’m very much against this feature.
Aave Interest Rate Uber Model v0.4(working on it/in progress) will include/solve this problem by offering more types of pools for the same asset & NFT LP position(with more risk management functions); will publish very soon!