MakerDAO Votes to Disable Aave DAI Supply, Reducing Celsius Exposure

MakerDAO, the organization behind the DAI stablecoin, is set to disable the Direct Deposit Module (D3M) for DeFi lending platform Aave later today.

“The Maker Governance has voted to temporarily disable the Aave DAI Direct Deposit Module” tweeted MakerDAO. The governance proposal, put forward earlier this week, invited the community to vote on temporarily disabling D3M for Aave, in order to reduce Maker’s exposure to embattled crypto lending platform Celsius.

The proposal was accepted unanimously by the community of governance token holders on June 15, and is set to be implemented today around 21.03 UTC.

It aims to prevent further borrowing by Celsius using Aave’s D3M by setting the Target Borrow Rate to 0 in the smart contract responsible for D3M.

“This change is being proposed to temporarily disable the Aave D3M.” read the proposal. “The Aave DAI Direct Deposit Module (D3M) Target Borrow Rate (bar) will be set to 0”

How Maker’s D3M works

The Direct Deposit Module (D3M) enables the interaction of the Maker ecosystem with third-party lending pools (eg., Aave). The goal of D3M is to maintain DAI’s interest rate across the lending pools, especially Aave. 

Aave has a total exposure of 200 million DAI (1 DAI = $1 according to CoinMarketCap) to Maker’s D3M, of which 100 million DAI is borrowed by Celsius using stETH (a representation of ETH staked with Lido) as collateral.

Celsius paused withdrawals and transfers for users earlier this week, amid growing concern over the DeFi lender’s exposure to stETH. With mounting uncertainty over the launch date of Ethereum’s upcoming Merge, stETH lost its peg against ETH—placing heavy selling pressure on stETH and risking a wave of redemptions at Celsius, which had locked customer funds into stETH.

If Celsius becomes insolvent and face margin calls, it would likely dump its stETH—causing it to depeg further from ETH. This, in turn, would make MakerDAO’s 100 million DAI loans to Celsius irrecoverable.

Hence, to protect their lending position and prevent further borrowing of DAI using stETH collateral, MakerDAO voted to temporarily pause the D3M.

Following Maker, Aave is also looking to freeze stETH and its use as collateral on the platform, according to a recent proposal dubbed “proposal 83”.

stETH has lost its peg and is currently hovering slightly below the price of ETH. Currently, stETH trades around $1,025, a 6% difference from the price of ETH, according to data from CoinMarketCap.

Maker (MKR), the native token of the MakerDAO ecosystem, is up 3.5% over the past 24 hours and is currently changing hands for around $767 apiece, per data from CoinMarketCap.