Aave Proposal to Peg Ethena's USDe to USDT Sparks Community Backlash

A new proposal submitted to Aave, the largest decentralized finance (DeFi) lending protocol, has triggered considerable community pushback. The proposal suggests hardcoding the price of Ethena’s synthetic stablecoin, USDe, to align with Tether’s USDT in Aave's pricing feeds. The move aims to safeguard Aave users from potential exposure to market volatility, but it has raised questions regarding its efficacy in addressing the protocol's core risks.

The Proposal

On January 3, 2025, a proposal co-authored by Chaos Labs and LlamaRisk was submitted to Aave’s community for discussion. The proposal aims to integrate USDe’s price directly with USDT in order to stabilize the value of staked USDe (sUSDe) in Aave's lending and borrowing ecosystem. By linking USDe to the widely-used USDT, the proposal aims to “align the sUSDe oracle with USDt pricing, ensuring seamless integration and avoiding disruptions caused by transient price fluctuations in USDe.”

LlamaRisk, notably, is part of Ethena’s risk committee, raising further attention to the proposal. While it seeks to reduce the risk of price instability from USDe fluctuations, the proposal has left many in the Aave community skeptical about its long-term implications.

Why Peg USDe to USDT?

Aave’s current system uses Chainlink’s price feed to determine the value of USDe in relation to the US dollar, but there is concern about the stability of this peg. USDe, created by Ethena, is a synthetic stablecoin backed by on-chain assets and derivatives, as opposed to the fiat-backed USDT. Despite its growing popularity, with a market capitalization of $5.85 billion, USDe’s value has been prone to fluctuations. This is in stark contrast to USDT, which maintains its peg to the U.S. dollar by holding reserves in traditional fiat currencies.

The proposal highlights that a significant depeg event, such as a 5% drop in the value of USDe, could expose Aave to substantial risk. Specifically, the authors point out that over $300 million worth of USDe-backed loans on Aave could be at risk of liquidation, leading to a domino effect of collateral sell-offs. The hardcoding of USDe’s price to USDT is seen as a preventative measure to avoid this scenario and protect Aave users from potential losses.

Community Backlash

Despite the well-intentioned proposal, the Aave community has voiced strong concerns. Some users question whether pegging USDe to USDT addresses the core risk factors of the protocol. “Hardcoding the USDe price to USDT price sounds a bit risky given USDe isn’t really intended to be a stablecoin,” said one user, Hazbobo. “What are the edge-case risks involved? What’s the worst-case scenario?”

Other users, like ElliotNess, were more critical of the proposal, calling it a "disappointingly low-quality ARFC" (Aave Request for Comments) that lacked thorough exploration of the potential risks. “This can be said of every non-hardcoded asset listed on the Aave protocol,” ElliotNess remarked, suggesting that the proposal failed to adequately address potential conflicts of interest and other underlying issues.

Moreover, ElliotNess argued that if Aave is considering hardcoding the price of USDe, it might be more effective to peg it directly to $1.00. This would eliminate secondary market deviations entirely and provide a more stable, predictable value.

Current Status and Future Plans

The proposal is still in its early stages of discussion, with no formal vote scheduled yet. The feedback from the community will likely shape the final decision on whether to implement this change.

At the time of publication, Aave’s native token, AAVE, was trading at $340, marking a 7% increase in the past 24 hours and an impressive 230% rise over the past year. Aave’s continued growth in 2024 has been driven by its expansion into new markets, including BNB Chain, Scroll, ZKsync Era, and Ether.fi, with plans for further integrations into platforms like Sonic, Mantle, Ethereum layer-2 Linea, and Bitcoin layer-2 BOB in 2025, pending community approval.

Ethena's 2025 Roadmap

Ethena, the company behind USDe, has also garnered attention with its 2025 roadmap, which includes a series of ambitious plans. On January 3, Ethena revealed plans to integrate its stablecoin ecosystem with Telegram, leveraging the messaging app's 900 million users. A new wrapped version of USDe, known as iUSDe, will also offer a 10% yield, making it an attractive savings product. Ethena aims to deliver a “neobank experience” within Telegram, offering users the ability to engage in payments and savings directly through the app.

The integration of Ethena’s stablecoin and its savings products could have far-reaching implications for DeFi adoption, as it taps into Telegram’s massive user base, potentially boosting the use of USDe and its derivatives.

Conclusion

The ongoing Aave proposal to peg USDe to USDT is generating significant debate within the DeFi community. While the proposal seeks to mitigate risks related to price volatility and protect Aave’s users, many argue that it might not address the fundamental issues related to synthetic stablecoins. As the discussion progresses, it remains to be seen whether Aave will proceed with this hardcoding approach or explore alternative solutions to enhance the protocol’s stability.