Another primary concern is that the way the protocol is set up, there is no lock mechanism nor staking incentive to ensure protocol safety, therefore it is possible that a large amount of MKR is loaned out for a borrower to come along and attack the system. Since Aave is the largest lender of MKR, this could pose an existential threat to the protocol.
Short/Medium term solution
With all that being said, I wanted to ask/propose whether the Aave community would be willing to consider disabling the ability to borrow MKR while leaving lending intact. This would still allow for flash loan and collateral revenues while also helping Maker out. As a side note, I notice from your analytics that not much revenue comes from MKR borrowing anyways. If for some reason this is unpalatable to you or your Risk team, I would be willing to present the MakerDAO community with a compensation proposal for this transaction. With our communities hopefully building a collaborative relationship in the future I hope that you will consider this proposal.
@LongForWisdom makes an additional good point below that disabling borrowing might actually bring Aave more business as MKR lenders would feel safer bringing their MKR over as collateral, thus borrowing other assets.
Should Aave disable MKR borrowing?
Yes
Yes, but only with compensation
No
Abstain
0voters
Next Steps
I am unsure how your governance process works so I will leave the outcome of this proposal up to your community. I will monitor this discussion for feedback. Thanks!
In general i agree with this proposal, since itās an important topic for one of the most relevant defi protocols on ethereum. I also think that most likely many MKR borrowers are afraid to provide liquidity to Aave and therefore borrow for this exact reason, which of course impacts borrow demand.
I have a question, if the community approves, what would your timeline for submitting the proposal be?
Iām asking because there is an important protocol update coming, that besides many other new features specifically designed for security, implements a borrow cap. The borrow cap would be a win-win for both Aave and Maker - it can be set right below the threshold that would be considered dangerous for the MKR governance, while still allowing the Aave protocol to earn MKR governance power. I voted abstain for now, until i understand what the timeline would be for this
Iām not sure how your governance process works so I would love to get some help pointing me to guidelines to do so. I did not know about this borrow cap addition which could be a nice middle-ground. If these new implementations could happen in tandem or afterwards that would be cool.
Essentially if you collect enough proposition power, the proposal can be created at any time. Ofc given that the timeline for introducing the borrow cap is relatively short, would be great to actually wait till that is proposed to the community
Just wanted to follow up and express support for this from the Maker side.
I think most of those using Aave with MKR as collateral are using it to get credit to be used elsewhere in the ecosystem. I donāt believe that preventing MKR borrows would impact this usecase significantly, but it would help us all breathe a little easier on the Maker side.
A couple of notes:
The level that is dangerous for Maker can change unpredictably depending on the level of support on various executive votes. Furthermore, if Aave aims to set the borrow limit just under the safe value, any combination with other lending protocols could allow a malicious actor to borrow more MKR than the āsafeā value. Personally it would be fantastic to see the borrow cap set at 0, but I understand this may not be feasible for Aave.
On the other hand, if Aave did set the borrow limit to zero for MKR, we would be able to refer anyone that wanted credit on their MKR to Aave with confidence that it isnāt negatively affecting the security of the protocol, this may lead to additional borrow demand for Aave on other assets.
We currently have this situation where people ask āCan we borrow DAI on Maker using MKRā to which the answer is no, as this has historically been deemed an unacceptable risk for the protocol. However, we are unable to refer them to a place where they can lever up on MKR safely - Aave could be this place, if it implemented a low-or-zero borrow limit on MKR.
Thanks @Aaron for the proposal. First and foremost, Itās good that MakerDAO and Aave communities are working together on solving topics that are important for both of the protocols. I think this an example how communities can be more inclusive and sets an example for the whole ecosystem.
For this particular topic, I think Makerās system could be redesigned in a way where borrowing MKR would not create a threat to the Maker system since limiting borrowing MKR on Aave Protocol would not solve the issue, rather would drive more yield on lending out MKR in centralized platforms or OTC market where the borrowing market would go towards.
My suggestion is that the Maker community should consider on how to change the current system in a way that would mitigate the attacks on the Maker system. I agree also that the borrowing of MKR is not primary use-case at Aave, and there is even larger discussion on whether these tokens should be borrowed out, occasionally we see MKR borrow volumes increase in case of so called yield farming opportunities.
@LongForWisdom thanks for joining the Aave forum! i understand your concerns - of course there is still the possibility of aggregating the MKR liquidity from multiple lending protocols, although this is something that disabling borrowing on aave only wouldnāt necessarily prevent, unless Aave becomes the āplace to goā to borrow against MKR. If that is the case as you are suggesting - ie making aware the MKR holders that the best place to borrow against MKR is aave - we can imagine MKR liquidity across other lending protocols might dry up - in that case, a safe borrow cap, consistently below the margin of risk - eg 0.1% of the total MKR supply (iām not completely aware of the MKR governance dynamics so that might be still too high - just to give an idea, can be lower ofc) would help?
To be clear, iām personally 100% in favor of the proposal - i simply believe that for Aave, acquiring governance power on other DeFi protocols is critically important and would be a shame missing out on this opportunity.
I totally agree with you @stani. We are in the unfortunate position that due to governance roadblock and developer badwidth, that option is not possible at this time. Thus I have come to you and the community as a workaround. I am unsure how this proposal would negatively affect Aave.
Can you explain what you mean by acquiring governance power? Is Aave intending to use lended funds of users to vote in their protocols? Sort of a proxy delegate?
Aave acquires a certain part of the interest repaid by borrowers, based on a parameter called reserve factor. For MKR, itās set to 20% (so 20% of the MKR repaid by MKR borrowers is accumulated by Aave). These MKR accumulated are automatically reinvested in Aave in the form of aMKR, so they start generate interest as well. This is true for all the assets listed on Aave - you can see the collector contract here InitializableAdminUpgradeabilityProxy | 0x464c71f6c2f760dda6093dcb91c24c39e5d6e18c, the governance currently holds 3.37 aMKR.
So by disabling borrowing, the main disadvantage for the aave governance is losing this constant stream of MKR - which i personally believe is valuable beyond its market value, so an asset worth acquiring for the governance itself.
Same happens for all the other defi protocols listed - YFI, CRV, UNI, SUSHI and so on.
If that is the deal breaker I would be willing to propose to the Maker community an annual MKR compensation based on total MKR held on Aave or something similar. Based on historical revenues as a percentage of borrow to lend ratio we could mint that amount of MKR and send it to the treasury annually averaged out. Just spitballing ideas. If Maker governance isnāt willing to meaningfully change tokenomics to curtail existing incentives then Iām open to more creative ideas. The first is finding out whether your community/governance process would approve any such type of proposal.
Awarding the Aave Governance Treasury with MKR for on-going basis would allow the Aave governance to obtain governance power and also for Maker community to further distribute governance power to key stakeholders, I would definitely support that as well since it brings the Aave and Maker communities closer together.
