Original title: Maker and Aave’s Ethena Feud

Original author: Jack Inabinet

Original source: bankless

Compiled by: Kate, Mars Finance

Aave sparks a fight over Maker’s growing USDe collateral.

Over $500 million in ENA was just distributed to eligible applicants via Ethena’s first airdrop, but the debate over the protocol has reached a fever pitch on Crypto Twitter. Why are two blue-chip DeFi protocols now embroiled in a conflict over Ethena?

Yesterday afternoon, a governance proposal appeared on the Maker forum asking delegates to consider increasing the capacity of Morpho’s recently established USDe and sUSDe lending facilities from 100 million DAI to 600 million DAI, with the ability to expand the line to 1 billion DAI, and most funds will be lent at relatively high loan-to-value ratios (LTV) of 86% or higher.

https://x.com/hexonaut/status/1774845614200906145?s=20

Maker’s increased use of Ethena’s synthetic USD stablecoin as collateral is part of an effort to increase DAI adoption at a time when its stablecoin’s market dominance has declined significantly, having plummeted 20% since the start of the year.

In response to the Maker governance proposal, an Aave contributor launched their own proposal, seeking to set the LTV of all Aave-deployed DAI to 0%, thereby eliminating the ability for users to borrow against DAI as collateral.

https://x.com/lemiscate/status/1775116242019299404?s=20

To the confusion of many, Aave expressed a willingness to add Ethena’s sUSDe to its V3 Ethereum deployment, with a March 19 temperature check receiving near-unanimous support, in line with the protocol’s recent increase in support for Maker targeting the token. The response from lending activity was in stark contrast.

While it is possible that DAI lending through Aave will be conducted in a risk-isolated manner (similar to how the sUSDe market may operate in the future), which would eliminate the possibility of contagion, Aave is no longer willing to underwrite Maker in pursuit of increasing DAI supply and funding. The increasing risks that will be taken when earning income.

Aave founder Stani Kulechov reiterated this view, suggesting that DAI be completely removed from all markets, saying that he believes that “with the new risk direction taken by MakerDAO, Aave DAO has little value.”

Source: Ave Governance

Given that the Ethena stablecoin is extremely profitable, sUSDe brings best-in-class returns to the stablecoin from financing/staking payments, and USDe throws out huge airdrop rewards, the demand for leverage on these assets is high and holders are willing Pay a premium to get it.

Although only 2% of the circulating DAI supply is secured by Maker’s current Ethena lending business, these loans have an annualized return of 36% and contribute 10% to Maker’s expected revenue.

While Maker's increasing adoption of Ethena assets as collateral has undoubtedly increased DAI's risk profile to some extent, Aave's retaliatory response feels harsh and could be seen as an effort to further support GHO - the protocol itself. Stablecoin and direct competitor to DAI – as the potential benefits that Ethena’s integration with Aave could bring to GHO are considered in governance proposals to support the sUSDe market…

Source: Ave Governance