Aave V4 Tries to Limit Lending Losses with DAO-Funded 'Umbrella' Coverage

Aave is proposing a new framework to mitigate lending losses in its V4 protocol. The plan, put forth by TokenLogic, would prioritize Aave's DAO funds in absorbing initial losses, followed by volunteer underwriters. This 'Umbrella' coverage would be limited to the Core liquidity Hub on Ethereum and only target three specific markets: WETH, USDC, and USDT.

The proposed targets for this underwriting are 800 ETH, 400,000 USDC, and 400,000 USDT, which TokenLogic has sized to cover six to eight weeks of expected loan growth. These targets would not represent existing balances but rather a specific configuration.

Under the framework, Aave's DAO would absorb an initial layer of losses through 'deficit offsets,' amounting to 33 ETH for Core WETH, 15,000 USDC for Core USDC, and 15,000 USDT for Core USDT. Volunteer underwriters could then be called upon to cover additional losses beyond this initial layer.

Eligibility for the coverage would include all borrowing from each protected reserve, including loans originated through Spokes. Underwriters would face a delay when leaving the program, with a 20-day cooldown followed by a two-day withdrawal window.