(Bloomberg) -- MakerDAO, a long-established decentralized autonomous organization that supports the stablecoin DAI, has suspended the token from being deposited and minted in Aave’s crypto lending platform.
The organization cast the vote to disable the DAI Direct Deposit Module on Aave, which effectively prevents traders from borrowing the stablecoin against a troubled derivative token stETH, citing adverse market conditions in a post Friday.
“The reason we believe this is risky is because out of 200 million DAI borrowed on Aave Ethereum v2, 100 million DAI is being borrowed by Celsius and collateralized mostly by stETH.” Primoz, a member of the Risk Core Unit Team at MakerDAO said in the Maker Forum.
Aave, which has a decentralized lending platform where traders can use arbitrage in transactions while borrowing or lending in the protocol, earlier proposed a different measure to MakerDAO. The proposal suggested to freeze the stETH market and increase the token’s liquidation threshold from 81% to 90% to mitigate the risks from stETH. However, MakerDAO described the measure as “unacceptable risk” and came up with its own plan to disable DAI’s deposit on Aave.
The derivative token stETH represents staked Ether, is designed to provide liquidity for those who put their Ether holdings in Ethereum’s new proof-of-stake protocol for high yields but still want to be able to sell their tokens before the network’s transition is complete and the lock-in period expires. However, sharp Ether price declines and a rout in the broader crypto market have prompted stETH holders to sell and send the token’s price lower than Ether.
That token has cast a pall over major crypto firms and it has been among the major catalysts for the bear market. Lending platform Celsius Network has paused withdrawals while facing liquidations with their collateralized stETH. Singapore-based crypto hedge fund Three Arrows Capital, which has sold a large amount of stETH, is facing severe liquidity issues.
“Contagion risks in DeFi are increasing,” Primoz said in the forum. There will be a meeting in two weeks to discuss potential reactivation of the module.
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