Maker and Aave’s Ethena Feud

Over $500 million in ENA was just distributed to eligible claimants through Ethena’s first round of airdrops, but contention over the protocol is reaching a fever pitch on Crypto Twitter. Why are two bluechip DeFi protocols now embroiled in conflict over Ethena?

Yesterday afternoon, a governance proposal hit the Maker forum asking delegates to consider increasing the capacity of recently established USDe and sUSDe lending facilities on Morpho from 100 million DAI to 600 million DAI, with the ability to extend the line to up to 1 billion DAI and the majority of funds set to be lent out at relatively high loan-to-value (LTV) ratios of 86% and greater.

Maker’s move to increase usage of Ethena’s synthetic dollar stablecoin as collateral is a play to increase DAI adoption and comes amid a marked decline in the market dominance of its stablecoin, which has plunged 20% since the beginning of the year.

In response to Maker’s governance proposal, an Aave contributor launched a proposal of their own, seeking to set the LTV of DAI to 0% across all Aave deployments, removing the ability of users to borrow against DAI as a collateral asset.

Confusing many is Aave’s demonstrated willingness to onboard Ethena’s sUSDe to its V3 Ethereum deployment, with the March 19 temperature check that passed with near unanimous support sharply contrasting with the protocol’s visceral reaction to Maker’s recent efforts to increase lending activities against the token.

While it is possible that DAI lending through Aave could be conducted in a risk-isolated fashion (similar to how future sUSDe markets will likely operate) that would eliminate the potential for contagion, Aave is no longer willing to underwrite the increasing amount of risk that Maker has demonstrated it will assume in the pursuit of bolstering DAI supply and treasury revenues.

Aave Founder Stani Kulechov reiterated this sentiment, proposing to off-board DAI from all markets completely and stating that he sees “little value for the Aave DAO with the new risk direction MakerDAO is adopting.”

Given the extremely high yields that Ethena’s stablecoins are earning, with sUSDe generating best in-class returns for a stablecoin from funding/staking payments and USDe throwing off tremendous airdrop rewards, demand for leverage on these assets is high and holders are willing to pay a premium to obtain it.

Despite just 2% of circulating DAI supply being collateralized by Maker’s current Ethena lending operations, these loans are earning a 36% annualized return and contributing 10% towards Maker’s expected revenues.

While Maker’s increased adoption of Ethena assets as collateral has undoubtedly increased the risk profile of DAI to some degree, Aave’s retaliatory reaction feels harsh and could be seen as geared toward further supporting GHO – the protocol’s own stablecoin and a direct competitor to DAI – seeing as the potential benefits that Ethena’s integration with Aave could produce for GHO were contemplated in the governance proposal to enable sUSDe markets…