Pure-Collateral Product

Other
1

Hi all,

I’m new to the Aave suite of products, but wanted to suggest/foster discussion on a “pure-collateral” product within the protocol that would allow users to deposit ETH or USDC or any other deemed asset solely as collateral without lending so it can be used to borrow. This can help:

i) grow user adoption

ii) mitigate extreme left market tail risks

Growing user adoption

As I understand it currently, in order to borrow, you must provide collateral. And in order to provide collateral you are forced to lend.

This effectively bars users who want to borrow, but do not want to take the risks from lending their collateral. Similar to traditional finance, you can let the user only take on their own borrowing risk without also lending out their collateral. From a personal non-defi/web3 native perspective, I wanted to borrow and had no problem to put collateral in, but had more risk aversion to lend out given potential borrower risk, even with deficit offset and umbrella module.

Mitigating Extreme Left Tail Risks

Would also think that this helps in risk management to mitigate left tail systemic shocks. For example, take the scenario of a catastrophic event that depletes the deficit offset and umbrella module. Lender funds could get slashed which would catalyze a forced unwind to liquidate debt as health factors fall… By providing a collateral only product, you could stem the contagion risks especially if individual collateral/balance sheets are healthy.

A note, I am not technical at all and would defer to the community on how to best implement this, if the protocol already handles issues like these. I just wanted to bring this up to foster discussion around the idea.

2

In the current model, the borrowers are paying the lenders. borrowers’ APY exceeds the APY of lenders of that asset (difference goes to the protocol) and all the borrowings are overcollateralized (you have to lend more in value than you can borrow, see LTV %)

In your model where collateral only would be deposited with no lending allowed, where would the APY come from? Or do you mean deposit as collateral only with no APY, only to allow borrowing ?

Also there must be a source of assets for borrowing. If many people think like you suggest here and deposit as collateral only, the protocol would quickly become short in liquidity for borrowers, how would you tackle this issue ?

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3

Hey,

If this post is meant to be a proposal, then please follow the guidelines for a TEMP CHECK.
I will move this post into off topic for now.