Aave’s decentralized autonomous organization (DAO) is evaluating a proposal to join the Lido Alliance and establish a dedicated market for the liquid staking protocol’s staked Ethereum (stETH) token.
The Lido Alliance aims to promote infrastructure development around stETH, focusing on restaking use cases. This alliance emerged in response to the rising dominance of EigenLayer, an innovative Ethereum restaking protocol that has significantly impacted the industry since its launch last year.
Why Aave is considering the Lido Alliance
The Aave Chan Initiative explained that a dedicated market would enhance the user experience for wstETH holders and maintain the lending protocol as the primary platform for Lido users.
Additionally, it would allow the DAO to adopt a more aggressive approach on the main Aave v3 instance, enabling borrowers to pay higher rates for WETH without adversely affecting long-term users.
The initiative also noted that a dedicated market would attract new WETH inflows due to Lido and potential Merit incentives. It stated:
“[The] benefits for Aave DAO are many. This will solidify our position as venue of choice for wstETH loopers; improve economics of wETH borrow for our users and DAO as we can go with higher rates later; and drive inflows from Lido Alliance incentives and new assets in risk isolated manner. Long term this grows Aave TVL, market share and revenues.”
The proposal indicates that the borrowing capacity of WETH on V3 will be set at 90% of the supplied WETH, with updates managed by the risk steward to ensure consistent profitability for both stETH and WETH loops. Further, the High-Efficiency Mode (E-Mode) will be among the most efficient in the industry, with approximately 50 basis points.
Meanwhile, support for the move appears strong, with the Aave community approving a preliminary temperature check to launch the market last week. Following the vote, Aave founder Stani Kulechov commented:
“[The] first tailored Aave market for Lido is coming online. Aave V3 is flexible enough to cater any kind of risk configuration preferences based on specific needs.”