Major Changes in the AAVE Ecosystem: The Umbrella Module Will Replace the Safety Module

The AAVE ecosystem recently passed a key proposal, with the long-awaited AAVE Umbrella module receiving community approval, set to be officially implemented on June 5, 2025. This marks the official replacement of the original Safety Module by the AAVE Umbrella module, which will take on the bad debt guarantee function of the AAVE ecosystem. This transformation will have a significant impact on the revenue model of the AAVE ecosystem.

What problems does the Umbrella module solve?

AAVE, as a decentralized over-collateralized lending protocol, faces core risks such as liquidation delays and bad debt issues caused by severe market fluctuations. Previously, AAVE mainly alleviated this risk through the Safety Module. The Safety Module is essentially a fund pool that can be tapped into to cover losses in case of bad debts within the protocol. To attract fund providers, AAVE offers generous incentives.

The Safety Module supports three types of assets: AAVE, Balancer AAVE/wstETH pool liquidity tokens BPT, and GHO. Users can stake these tokens in the Safety Module to earn AAVE token rewards. In the event of bad debts, these funds will be used for compensation, with a maximum slashing ratio of 30% (GHO is 99%). Staked funds require a 20-day cooling period and a 2-day redemption period for withdrawal.

However, the Safety Module has two main issues:

1. High maintenance costs: Annual incentive expenditures reach approximately $66 million, and these incentives come from the issuance of AAVE, putting pressure on the market value of AAVE.

2. Low capital efficiency: The assets in the Safety Module are not highly correlated with the actual lending assets, requiring additional conversion steps when dealing with bad debts, which affects efficiency.

To address these issues, the AAVE team proposed the Umbrella module, which mainly has three optimizations:

1. The types of funds are more aligned with lending needs, introducing new assets such as stkwaUSDC, stkwaUSDT, and stkwaETH.

2. Use a release curve model to determine staking yield, increasing capital utilization efficiency.

3. The Slashing mechanism is automatically executed by smart contracts, replacing the original DAO governance triggers.

GHO Staking Yield Declines Significantly

In the new Umbrella module, the risk compensation yield rate of GHO will significantly decrease. Based on the latest parameters, assuming all current stkGHO stakers transfer to the Umbrella module, the user holding interest rate will drop from the current 13% to about 7.7%. This change could lead to a substantial shrinkage in the issuance of GHO.

The current total supply of GHO is 238 million, of which approximately 71% is participating in stkGHO staking. A decrease in yield will inevitably lead to a reduction in GHO demand until the supply and demand relationship rebalances. However, as the current total collateral of GHO exceeds 245%, which is at a healthy level, a run on the liquidity is unlikely to occur in the short term.

From the perspective of the AAVE protocol, this is a reassessment and adjustment of the GHO development model. Previously, the demand for GHO was mainly based on governance token subsidies, which lacked sustainability. After this update, the AAVE team may focus more on the practical application scenarios of decentralized stablecoins to rebuild the competitiveness of GHO.

Overall, the launch of the Umbrella module has optimized the supply-side pressure of AAVE tokenomics and improved capital efficiency. However, it is also necessary to pay attention to the impact of existing participants on the protocol during the transition. For stkGHO participants, it may be necessary to seek new yield opportunities.