I am not usually one to comment on whether I think governance proposals is good or bad. I generally like to be a neutral observer as the protocols and consensus methods are highly novel, and there are bound to be hiccups and challenges all along the way. But I find the latest Aave vote to purchase CRV a little disquieting.
As a quick refresher, Aave has loaned the founder of Curve tens of millions of dollars worth of stablecoins using his CRV as collateral. However, the CRV collateral far outstripped the available liquidity for CRV. As the price of CRV recently fell, Aave potentially may have needed to liquidate the loan. But as there was insufficient CRV liquidity, Aave would be left with a ton of bad debt that Aave stakers would have to cover. Importantly, Aave was not the only protocol that lent Egorov money on his CRV collateral. To many commentators, the sudden liquidation of CRV collateral was a systemic risk to DeFi. Egorov ended up paying a large portion of his loan down, so as far as I am aware, the immediate threat has passed. However, there is still little CRV liquidity and many CRV collateralized loans. For a more in-depth breakdown, check out the AF post by Eason.
Like the other protocols with CRV debt, Aave has been working to navigate the crisis in many ways. There are rumors of CRV OTC deals and ‘off-chain communication.’ Now, Aave is voting on using some of its treasury to purchase CRV on the open market. Using treasury funds to buy distressed assets gives me pause, and I worry that this will set a bad precedent with Aave. The proposal requests Aave use 2M USDT to purchase CRV as a strategic acquisition to support the DeFi ecosystem and to use for GHO-gauge voting.
I find the proposal concerning for a few reasons: First, I think this proposal is more to support the price of CRV to take pressure off the loan to ensure Aave isn’t left with bad debt rather than participate in the ‘Curve Wars.’ Aave already has a working relationship with Balancer and the stock of veBAL for GHO gauge votes. Secondly, I think the vote introduces many moral hazards to Aave’s operations. Arguably, CRV plummeting to zero due to a colossal liquidation is a systemic risk to DeFi. But, if this vote passes, Aave is signaling that it will use its treasury to protect certain positions it sees as systemically risky. But then, who decides which positions are dangerous? Thirdly, to me, at least, treasury funds are meant to ensure the continued development and operation of the protocol, not acquire assets to support certain positions. Fourthly, this vote seems to signal a lot of human involvement in what should be an autonomous system. And with regulators focusing on the space, this could have some adverse side effects for Aave.
As I said, governance and operations of DeFi protocols are new and hugely challenging – hence why I don’t want to be particularly harsh to Aave. I have a lot of respect for Aave and their team. It’s a super exciting protocol and a cornerstone of DeFi. But this vote, and what it signals, could have a lot of negative repercussions later on, and it might not be the best move. But I am very interested to see what others think about it; I could be wrong.