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Overall, the launch of Aave Umbrella has optimized the supply-side pressure on AAVE tokenomics and improved capital efficiency from the project's perspective. However, it is necessary to observe the impact on the protocol during the transition of participants in the original incentive scenarios. For stkGHO participants alone, it may be time to seek other yield opportunities.
Summary: This week, the AAVE ecosystem passed a key proposal. The long-awaited Aave Umbrella module has been recognized by the community and will be implemented on June 5, 2025. From then on, the Aave Umbrella module will officially replace the original Safety Module and take over the bad debt guarantee function of the AAVE ecosystem. Personally, I was very fond of the stkGHO yield scenario in the original Safety Module, which could provide a stable 13% annualized return on a stablecoin basis under controllable risks—it was undeniably attractive. However, the passage of this proposal will bring significant changes to the original yield paradigm of the AAVE ecosystem. Therefore, I have summarized this article to introduce the specific impacts of Aave Umbrella's passage and share them with you. Overall, the launch of Aave Umbrella has optimized the supply-side pressure on AAVE tokenomics and improved capital efficiency from the project's perspective. However, it is necessary to observe the impact on the protocol during the transition of participants in the original incentive scenarios. For stkGHO participants alone, it may be time to seek other yield opportunities.
What Problems Does the Aave Umbrella Module Solve?
First, let's introduce the significance of the Aave Umbrella module. As a decentralized over-collateralized lending protocol, AAVE's core risk stems from the potential for untimely liquidations leading to bad debts when market volatility causes a sharp decline in collateral value and liquidity. Before Aave Umbrella, AAVE primarily mitigated this risk through the Safety Module, which is essentially a capital pool that can be used to cover protocol losses in the event of bad debts. To compensate the capital providers who bear the protocol's bad debt risk, AAVE allocated substantial incentives.
In the Safety Module, three types of capital are supported: AAVE, the liquidity certificate BPT in the Balancer AAVE/wstETH Pool, and GHO. Users holding these three tokens can stake them in the Safety Module to earn AAVE token rewards released by the protocol. The staked funds will be used to compensate for bad debts in the event of AAVE's bad debt issues, a process also known as "slashing." The maximum slashing ratio for the first two assets is 30%, while for GHO, it is 99%. In addition, when redeeming the staked funds, a 20-day cooling-off period and a 2-day redemption period are required; failure to redeem within this time will result in re-staking.
This mechanism design has two advantages. In addition to mitigating the protocol's bad debt risk, the yield capability also creates use cases for the relevant tokens, thereby generating demand for AAVE and GHO tokens. As of now, the total amount of capital in the Safety Module has reached $1.14 billion, with $744 million staked in AAVE, $222 million in ABPT, and $170 million in GHO.
However, this mechanism primarily has two issues:
High maintenance costs;
Low capital efficiency.
Firstly, the cost AAVE pays to attract this capital is astonishing. Based on the current interest rate levels, the staking APR for stkAAVE is 4.57%, for stkGHO is 5.55%, and for stkABPT is 10.18%. Combining this with TVL, we can roughly estimate that the annual incentive expenditure is around $66 million, and this incentive is derived from the issuance of AAVE, which exerts considerable pressure on the market value maintenance of AAVE.
Secondly, since the capital categories only involve AAVE tokens and GHO-related assets, considering that AAVE is a blue-chip asset lending protocol, the core category of bad debts should be blue-chip assets, such as USDT, ETH, etc. When bad debts occur, relying on the current Safety Module means that AAVE-related tokens or GHO must be sold to recover the bad debt assets to cover the losses, which also poses an additional challenge to the liquidity of AAVE and GHO. Therefore, it can be said that the capital pool built with high rewards does not demonstrate high capital efficiency in mitigating bad debt risks.
To optimize these two issues, the AAVE team proposed Aave Umbrella to replace the original Safety Module. In simple terms, Aave Umbrella mainly has three optimizations:
In terms of capital categories, it adopts aToken, which has a higher correlation with protocol borrowing, to attract capital. Each aToken will only be responsible for guaranteeing the underlying token, replacing the original dependence on AAVE tokens and GHO-related tokens for all borrowings. In this upgrade, three new assets are mainly introduced: stkwaUSDC (staked wrapped aUSDC), stkwaUSDT, and stkwaETH.
In terms of incentive distribution, it uses an emission curve model to determine the final staking yield for each asset. The interest rate will be affected by three parameters: target liquidity, current total staked amount, and maxEmission. In simple terms, the emission curve is a three-segment function:
(1) When the staked amount is insufficient to reach the preset target liquidity, the protocol will increase the AAVE rewards distributed per unit value of staked tokens. However, the growth rate will slow down as it approaches Target Liquidity until it reaches maxEmission.
(2) When the staked amount reaches within a threshold (possibly 20%) of Target Liquidity, the protocol will linearly reduce the AAVE rewards distributed per unit value of staked tokens.
(3) When the staked amount exceeds the threshold, the unit reward amount remains unchanged.
The overall APY change follows the shape of the yellow line, which is a segmented function. The main advantage of this approach is capital efficiency. By adjusting the interest rates, the safety capital amount is kept within a reasonable range to avoid excessive subsidies from the protocol. The system parameters in this adjustment are shown in the figure below, with the unit being the base token.
The AAVE release adjustment for the original three tokens is as follows:
In the slashing mechanism, automatic execution at the smart contract level replaces the original proactive triggering that relied on DAO governance.
The first two points are more important for DeFi users because both the yield medium and the yield rate have changed. Considering that the incentive adjustments for AAVE and ABPT are gradual, we will mainly focus on the yield changes of stkGHO to illustrate the impact of Aave Umbrella.
From 13% to 7.7%: A Structural Shift in the Risk-Reward Model for GHO Stakers
Since AAVE has provided a transition period for the reward adjustments of stkAAVE and stkABPT in this upgrade, the changes in rewards are not particularly significant. This is naturally a consideration to stabilize the demand and liquidity of AAVE. However, for stkGHO within the new Umbrella module, the risk-compensating yield for GHO has dropped significantly. First, let's calculate according to the latest interest rate model and current preset parameters:
(1) Target Liquidity: $12 million
(2) maxEmissionPerYear: $1.2 million
(3) Current total staked amount of stkGHO: $170 million
Assuming that all current stkGHO stakers switch entirely to the Umbrella module, the user's holding interest rate would be only 0.56%, which is far below the current 5.55%. Of course, considering the 7.14% yield allocated to GHO users in the Merit module, the final yield might drop from the current 13% to around 7.7%. This is, of course, assuming that all stkGHO stakers fully switch to the Umbrella module. Considering capital outflows, the actual yield would be higher than this value. For specific calculations, you can refer to the Desmos link for your own calculations. Of course, the decrease in yield also comes with a reduction in risk. In the future, stkGHO stakers will only need to bear the bad debt risk of GHO borrowings.
What Impacts Can We Expect?
The issuance volume of GHO is likely to contract significantly. Currently, out of the total 238 million GHO, 170 million is staked in stkGHO, accounting for about 71% of the total. This high staking volume indicates that most of the current demand for GHO comes from the yield of stkGHO in the Safety Module. A substantial drop in yield will inevitably lead to a loss of demand for GHO until a new balance in supply and demand is reached. However, there is no need to worry too much about a bank run during this process, as the total collateral for GHO is currently over 245%, which is a very healthy level.
A Reassessment of GHO's Development Model from the Perspective of the AAVE Protocol
This is a reevaluation and adjustment of the previously unhealthy development model of GHO. Before this update, the demand for GHO was primarily based on governance token subsidies, rather than actual sustainable demand. After this update, perhaps the AAVE team will focus more on creating GHO's competitiveness in actual demand scenarios such as a decentralized stablecoin in payment media, censorship resistance, and improving the capital efficiency of lending protocols. However, it is inevitable to lament that an era of a "magic mine" may have come to an end.
Overall, the launch of Aave Umbrella has optimized the supply-side pressure on AAVE tokenomics and improved capital efficiency from the project's perspective. However, it is necessary to observe the impact on the protocol during the transition of participants in the original incentive scenarios. For stkGHO participants alone, it may be time to seek other yield opportunities.
Summary: This week, the AAVE ecosystem passed a key proposal. The long-awaited Aave Umbrella module has been recognized by the community and will be implemented on June 5, 2025. From then on, the Aave Umbrella module will officially replace the original Safety Module and take over the bad debt guarantee function of the AAVE ecosystem. Personally, I was very fond of the stkGHO yield scenario in the original Safety Module, which could provide a stable 13% annualized return on a stablecoin basis under controllable risks—it was undeniably attractive. However, the passage of this proposal will bring significant changes to the original yield paradigm of the AAVE ecosystem. Therefore, I have summarized this article to introduce the specific impacts of Aave Umbrella's passage and share them with you. Overall, the launch of Aave Umbrella has optimized the supply-side pressure on AAVE tokenomics and improved capital efficiency from the project's perspective. However, it is necessary to observe the impact on the protocol during the transition of participants in the original incentive scenarios. For stkGHO participants alone, it may be time to seek other yield opportunities.
What Problems Does the Aave Umbrella Module Solve?
First, let's introduce the significance of the Aave Umbrella module. As a decentralized over-collateralized lending protocol, AAVE's core risk stems from the potential for untimely liquidations leading to bad debts when market volatility causes a sharp decline in collateral value and liquidity. Before Aave Umbrella, AAVE primarily mitigated this risk through the Safety Module, which is essentially a capital pool that can be used to cover protocol losses in the event of bad debts. To compensate the capital providers who bear the protocol's bad debt risk, AAVE allocated substantial incentives.
In the Safety Module, three types of capital are supported: AAVE, the liquidity certificate BPT in the Balancer AAVE/wstETH Pool, and GHO. Users holding these three tokens can stake them in the Safety Module to earn AAVE token rewards released by the protocol. The staked funds will be used to compensate for bad debts in the event of AAVE's bad debt issues, a process also known as "slashing." The maximum slashing ratio for the first two assets is 30%, while for GHO, it is 99%. In addition, when redeeming the staked funds, a 20-day cooling-off period and a 2-day redemption period are required; failure to redeem within this time will result in re-staking.
This mechanism design has two advantages. In addition to mitigating the protocol's bad debt risk, the yield capability also creates use cases for the relevant tokens, thereby generating demand for AAVE and GHO tokens. As of now, the total amount of capital in the Safety Module has reached $1.14 billion, with $744 million staked in AAVE, $222 million in ABPT, and $170 million in GHO.
However, this mechanism primarily has two issues:
High maintenance costs;
Low capital efficiency.
Firstly, the cost AAVE pays to attract this capital is astonishing. Based on the current interest rate levels, the staking APR for stkAAVE is 4.57%, for stkGHO is 5.55%, and for stkABPT is 10.18%. Combining this with TVL, we can roughly estimate that the annual incentive expenditure is around $66 million, and this incentive is derived from the issuance of AAVE, which exerts considerable pressure on the market value maintenance of AAVE.
Secondly, since the capital categories only involve AAVE tokens and GHO-related assets, considering that AAVE is a blue-chip asset lending protocol, the core category of bad debts should be blue-chip assets, such as USDT, ETH, etc. When bad debts occur, relying on the current Safety Module means that AAVE-related tokens or GHO must be sold to recover the bad debt assets to cover the losses, which also poses an additional challenge to the liquidity of AAVE and GHO. Therefore, it can be said that the capital pool built with high rewards does not demonstrate high capital efficiency in mitigating bad debt risks.
To optimize these two issues, the AAVE team proposed Aave Umbrella to replace the original Safety Module. In simple terms, Aave Umbrella mainly has three optimizations:
In terms of capital categories, it adopts aToken, which has a higher correlation with protocol borrowing, to attract capital. Each aToken will only be responsible for guaranteeing the underlying token, replacing the original dependence on AAVE tokens and GHO-related tokens for all borrowings. In this upgrade, three new assets are mainly introduced: stkwaUSDC (staked wrapped aUSDC), stkwaUSDT, and stkwaETH.
In terms of incentive distribution, it uses an emission curve model to determine the final staking yield for each asset. The interest rate will be affected by three parameters: target liquidity, current total staked amount, and maxEmission. In simple terms, the emission curve is a three-segment function:
(1) When the staked amount is insufficient to reach the preset target liquidity, the protocol will increase the AAVE rewards distributed per unit value of staked tokens. However, the growth rate will slow down as it approaches Target Liquidity until it reaches maxEmission.
(2) When the staked amount reaches within a threshold (possibly 20%) of Target Liquidity, the protocol will linearly reduce the AAVE rewards distributed per unit value of staked tokens.
(3) When the staked amount exceeds the threshold, the unit reward amount remains unchanged.
The overall APY change follows the shape of the yellow line, which is a segmented function. The main advantage of this approach is capital efficiency. By adjusting the interest rates, the safety capital amount is kept within a reasonable range to avoid excessive subsidies from the protocol. The system parameters in this adjustment are shown in the figure below, with the unit being the base token.
The AAVE release adjustment for the original three tokens is as follows:
In the slashing mechanism, automatic execution at the smart contract level replaces the original proactive triggering that relied on DAO governance.
The first two points are more important for DeFi users because both the yield medium and the yield rate have changed. Considering that the incentive adjustments for AAVE and ABPT are gradual, we will mainly focus on the yield changes of stkGHO to illustrate the impact of Aave Umbrella.
From 13% to 7.7%: A Structural Shift in the Risk-Reward Model for GHO Stakers
Since AAVE has provided a transition period for the reward adjustments of stkAAVE and stkABPT in this upgrade, the changes in rewards are not particularly significant. This is naturally a consideration to stabilize the demand and liquidity of AAVE. However, for stkGHO within the new Umbrella module, the risk-compensating yield for GHO has dropped significantly. First, let's calculate according to the latest interest rate model and current preset parameters:
(1) Target Liquidity: $12 million
(2) maxEmissionPerYear: $1.2 million
(3) Current total staked amount of stkGHO: $170 million
Assuming that all current stkGHO stakers switch entirely to the Umbrella module, the user's holding interest rate would be only 0.56%, which is far below the current 5.55%. Of course, considering the 7.14% yield allocated to GHO users in the Merit module, the final yield might drop from the current 13% to around 7.7%. This is, of course, assuming that all stkGHO stakers fully switch to the Umbrella module. Considering capital outflows, the actual yield would be higher than this value. For specific calculations, you can refer to the Desmos link for your own calculations. Of course, the decrease in yield also comes with a reduction in risk. In the future, stkGHO stakers will only need to bear the bad debt risk of GHO borrowings.
What Impacts Can We Expect?
The issuance volume of GHO is likely to contract significantly. Currently, out of the total 238 million GHO, 170 million is staked in stkGHO, accounting for about 71% of the total. This high staking volume indicates that most of the current demand for GHO comes from the yield of stkGHO in the Safety Module. A substantial drop in yield will inevitably lead to a loss of demand for GHO until a new balance in supply and demand is reached. However, there is no need to worry too much about a bank run during this process, as the total collateral for GHO is currently over 245%, which is a very healthy level.
A Reassessment of GHO's Development Model from the Perspective of the AAVE Protocol
This is a reevaluation and adjustment of the previously unhealthy development model of GHO. Before this update, the demand for GHO was primarily based on governance token subsidies, rather than actual sustainable demand. After this update, perhaps the AAVE team will focus more on creating GHO's competitiveness in actual demand scenarios such as a decentralized stablecoin in payment media, censorship resistance, and improving the capital efficiency of lending protocols. However, it is inevitable to lament that an era of a "magic mine" may have come to an end.
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