Aave Umbrella officially passed: stkGHO APY 13% stablecoin god mine falls?

Author: ++@Web3Mario (https://x.com/web3_mario)++

Abstract: This week, the AAVE ecosystem passed a key proposal, and the long-awaited AAVE Umbrella module has been recognized by the community, set to be executed on June 5, 2025. The AAVE Umbrella module will officially replace the original Safety Module, taking on the bad debt guarantee function of the AAVE ecosystem. Personally, I was very fond of the original Safety Module's stkGHO yield scenario, which provided a stablecoin-based annual yield of 13% under controllable risk, making it quite attractive. However, the passage of this proposal will bring significant changes to the original yield paradigm of the AAVE ecosystem. Therefore, I have summarized this article to introduce the specific impacts of the Aave Umbrella's implementation and share them with everyone. Overall, the launch of Aave Umbrella optimizes the supply-side pressure on AAVE tokenomics, enhancing capital efficiency from the project's perspective, but we need to observe the impact on the protocol during the transition of existing incentive scenario participants, and for stkGHO participants, it may be necessary to seek other yield scenarios.

What Problems Does the Aave Umbrella Module Solve?

First, we need to introduce the significance of the Aave Umbrella module. We know that AAVE, as a decentralized over-collateralized lending protocol, faces core risks primarily from severe market fluctuations that can lead to a drastic decline in the value and liquidity of collateral, potentially triggering bad debt issues due to delayed liquidations. Before the Aave Umbrella, AAVE mainly relied on the Safety Module to mitigate this risk. Simply put, it is a fund pool that can be used to cover protocol losses when bad debts occur. To incentivize the providers of funds who bear the risk of protocol bad debts, AAVE allocated relatively generous rewards to them.

The Safety Module supports three types of asset categories: AAVE, liquidity tokens BPT in the Balancer AAVE/wstETH Pool, and GHO. Users holding these three tokens can stake them in the Safety Module to earn AAVE token rewards released by the protocol. The staked funds will be used to compensate for losses when AAVE faces bad debt issues, a process also known as "slashing." The maximum slashing ratio for the first two assets is 30%, while for GHO, it is 99%. Additionally, staked funds must undergo a 20-day cooling-off period and a 2-day redemption period upon withdrawal, and any timeout will result in re-staking.

This mechanism design has two benefits: it alleviates the protocol's bad debt risk, and the yield capability creates use cases for the related tokens, thereby generating demand for AAVE tokens and GHO. As of now, the total amount of funds in the Safety Module has reached $1.14B, with AAVE staked value at $744M, ABPT staked value at $222M, and GHO staked value at $170M.

However, this mechanism mainly has two issues:

• High maintenance costs;
• Low capital efficiency;

Firstly, the cost that AAVE incurs to attract this portion of funds is astonishing. Based on current interest rate levels, the staking APR for stkAAVE is 4.57%, for stkGHO is 5.55%, and for stkABPT is 10.18%. Roughly estimating the annual incentive expenditure based on TVL, it is around $66M, and this incentive comes from the inflation of AAVE, which puts considerable pressure on AAVE's market value.

Secondly, since the asset categories only involve AAVE tokens and GHO-related assets, considering that AAVE is a blue-chip asset lending protocol, the core category of bad debts should be blue-chip assets, such as USDT and ETH. When bad debts occur, relying on the current Safety Module means having to sell AAVE-related tokens or GHO to cover the bad debt, which also brings additional challenges to the liquidity of AAVE and GHO. Therefore, it can be said that the capital efficiency reflected in the risk mitigation of bad debts through a high-reward fund pool is not very high.

To optimize these two issues, the AAVE team proposed the Aave Umbrella to replace the original Safety Module. In simple terms, the Aave Umbrella has three main optimizations:

1. In terms of asset categories, it adopts aTokens that are more closely related to protocol borrowing to attract funds, with each aToken only responsible for guaranteeing the corresponding underlying token, replacing the previous reliance on AAVE tokens and GHO for all borrowings. In this upgrade, three new assets are mainly introduced: stkwaUSDC (staked wrapped aUSDC), stkwaUSDT, and stkwaETH.

2. In terms of incentive distribution, a release curve model is used to determine the final staking yield for each asset, with interest rates influenced by target liquidity, current total staked amount, and maxEmission. Simply put, the release curve is a piecewise function:

   (1) When the staked amount is below the preset target liquidity, the AAVE rewards distributed per unit value of staked tokens will increase, but the growth rate will slow down as it approaches the Target Liquidity until it reaches maxEmission;

   (2) When the staked amount reaches the Target Liquidity and an excess threshold (possibly 20%), the AAVE rewards distributed per unit value of staked tokens will decrease linearly;

   (3) When the staked amount exceeds the threshold, the unit reward amount will remain unchanged;

The overall APY changes will follow the shape of the yellow line, representing a piecewise function. The benefit of this approach mainly lies in capital efficiency, controlling the amount of secure funds within a reasonable range through interest rate adjustments to avoid excessive protocol subsidies. In this adjustment, the system parameters are shown in the figure, with units priced in base tokens.

The adjustments for the AAVE release of the original three tokens are as follows:

3. In terms of the slashing mechanism, automatic execution at the smart contract level replaces the previous reliance on DAO governance for proactive triggering.

The first two points are more important for DeFi users because both the yield medium and the yield rates have changed. Considering that the incentive adjustments for AAVE and ABPT adopt a gradual approach, we will mainly discuss the yield rate changes for stkGHO to illustrate the impact of the Aave Umbrella.

From 13% to 7.7%, the Risk-Return Model for GHO Stakers Undergoes a Structural Change

Due to the transition period provided for the reward adjustments for stkAAVE and stkABPT after this upgrade, the changes in rewards are not particularly large, which is naturally a consideration for stabilizing the demand and liquidity for AAVE. However, in the new Umbrella module, the risk compensation yield rate for GHO significantly decreases: first, we calculate based on the latest interest rate model, combined with the current preset parameters:

(1) Target Liquidity: $12M

(2) maxEmissionPerYear: $1.2M

(3) Current total staked amount of stkGHO: $170M

Assuming that current stkGHO stakers fully switch to the Umbrella module, the user's holding yield rate would only be 0.56%, which is far below the current 5.55%. Of course, considering the 7.14% yield allocated to GHO users in the Merit module, the final yield may drop from the current 13% to around 7.7%, provided that all stkGHO stakers completely switch to the Umbrella module. Given the potential outflow of funds, the actual yield rate would be higher than this figure. ++For specific calculations, please refer to the Desmos link for self-calculation.++ Of course, the decrease in yield rate also comes with a reduction in risk; in the future, stkGHO stakers will only need to bear the bad debt risk of GHO borrowing.

Next, let's explore what impacts this will have. It is foreseeable that the issuance of GHO will see a significant shrinkage. Currently, GHO's total supply is 238M, with funds participating in stkGHO reaching 170M, accounting for about 71% of the total. This high staking volume indicates that the majority of current demand for GHO still stems from the staking rewards of stkGHO in the Safety Module. The significant decline in yield rates will inevitably lead to a loss of demand for GHO until a new balance of supply and demand is reached. However, the risk of a run during this process should not be a major concern, as the current total collateral for GHO exceeds 245%, which is at a very healthy level.

From the perspective of the AAVE protocol, this is a re-examination and adjustment of the unhealthy development model of GHO in the past, as prior to this, the demand for GHO was largely based on governance token subsidies without actual sustainable demand support. After this update, perhaps the AAVE team will focus more on the practical demand scenarios for decentralized stablecoins in payment mediums, censorship resistance, and improving the capital efficiency of lending protocols to rebuild GHO's competitiveness. However, it is somewhat lamentable that a once-great mining opportunity may just fade away.