The AAVE ecosystem will replace the Safety Module with the Umbrella module through an important proposal.

The AAVE ecosystem recently passed a key proposal, and the long-planned AAVE Umbrella module has gained community approval, set to be officially implemented on June 5, 2025. This means that the AAVE Umbrella module will officially replace the original Safety Module, taking on the role of guaranteeing bad debts in the AAVE ecosystem.

This change will have a significant impact on the revenue model of the AAVE ecosystem. Overall, the launch of the Umbrella module optimizes the supply-side pressure of AAVE token economics, improving the capital efficiency for the project team. However, attention should also be paid to the potential impact on the protocol caused by original incentive mechanism participants during the transition period, especially for stkGHO participants, who may need to seek other sources of revenue.

Core Issues Addressed by the Umbrella Module

The Umbrella module mainly addresses two issues: first, excessive maintenance costs, and second, low capital efficiency.

In the existing Safety Module, AAVE has incurred significant costs to attract funds. According to the current interest rate levels, the staking yields for stkAAVE, stkGHO, and stkABPT are 4.57%, 5.55%, and 10.18%, respectively. Based on a rough estimate of the total locked amount, the annual incentive expenditure is approximately $66 million, and these incentives come from AAVE's issuance, putting pressure on AAVE's market value maintenance.

Secondly, the types of funds in the Safety Module mainly consist of AAVE tokens and GHO-related assets, which do not match well with the bad debt risk of AAVE as a blue-chip asset lending protocol. When bad debts occur, it is necessary to liquidate these assets to exchange for the bad debt assets, which poses an additional challenge to the liquidity of AAVE and GHO.

To optimize these issues, the Umbrella module has made three improvements:

1. Use aToken with higher correlation to protocol lending as the source of funds, with each aToken only responsible for the collateral of the corresponding underlying token. This upgrade introduces three new assets: stkwaUSDC, stkwaUSDT, and stkwaETH.

2. Use the release curve model to determine the staking yield of each asset, influenced by three parameters: target liquidity, current total stake amount, and maximum release amount.

3. The slashing mechanism is automatically executed by smart contracts, replacing the original governance-dependent proactive trigger.

GHO Staking Yield Significantly Decreased

In the new Umbrella module, the risk compensation yield for GHO will significantly decrease. According to the latest interest rate model and preset parameters, assuming all current stkGHO stakers transfer to the Umbrella module, the user-held interest rate will only be 0.56%, far lower than the current 5.55%. Considering the 7.14% yield allocated to GHO users by the Merit module, the final yield may drop from the current 13% to around 7.7%.

This change will lead to a significant reduction in the issuance of GHO. Currently, the total amount of GHO is 238 million, with 170 million participating in stkGHO, accounting for 71%. The sharp decline in yield means that the demand for GHO will be lost until the supply and demand relationship is rebalanced. However, due to the current total collateral of GHO exceeding 245%, which is at a healthy level, the risk of a run in the short term is relatively small.

From the perspective of the AAVE protocol, this is an adjustment to the previously unhealthy development model of GHO. In the future, the AAVE team may focus more on the actual demand scenarios for decentralized stablecoins to rebuild the competitiveness of GHO. However, it must be said that a highly sought-after high-yield opportunity has thus disappeared.