Major Changes in the AAVE Ecosystem: Umbrella Module Replaces Safety Module, Changing the Revenue Structure

The AAVE ecosystem has recently passed a key proposal, and the long-awaited AAVE Umbrella module has received community approval, set to be officially implemented on June 5, 2025. The Umbrella module will replace the original Safety Module, taking 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.

Problems Solved by the Umbrella Module

AAVE, as a decentralized over-collateralized lending protocol, faces primary risks from the sharp fluctuations in the market that lead to the decline in the value of collateral and bad debts resulting from untimely liquidations. Previously, AAVE mitigated this risk through the Safety Module, providing substantial incentives for liquidity providers.

However, the Safety Module has two main issues:

1. High maintenance costs
2. Low capital efficiency

An annual incentive expenditure of approximately $66 million puts pressure on AAVE's market capitalization. At the same time, due to the limited categories of funds being restricted to AAVE tokens and GHO-related assets, the efficiency in handling bad debts of mainstream assets is not high.

Main Optimizations of the Umbrella Module

1. Fund Category: Introduce aTokens with a higher correlation to borrowing and lending, such as stkwaUSDC, stkwaUSDT, stkwaETH, etc.

2. Incentive Distribution: The release curve model is used to determine the staking yield of each asset, influenced by target liquidity, total current staking amount, and maximum release amount.

3. Slashing mechanism: Automatically executed by smart contracts, replacing the original trigger mechanism that relied on DAO governance.

Changes in GHO Staking Rewards

In the new Umbrella module, the GHO risk compensation yield has significantly decreased. Assuming that all current stkGHO stakers migrate to the Umbrella module, the user-held interest rate will drop from around 13% to about 7.7%. This change may lead to a significant reduction in the issuance of GHO, as the current demand for GHO largely stems from the high staking rewards in the Safety Module.

Impact and Outlook

1. The issuance of GHO may significantly decrease, but the collateralization rate is healthy, and the short-term risk of a run is relatively small.

2. The AAVE protocol re-examines the development model of GHO and may shift towards exploring the practical application scenarios of decentralized stablecoins in payments, censorship resistance, and improving the capital efficiency of lending protocols.

3. The original high-yield "God Mining" model may come to an end, and the AAVE ecosystem is entering a new development stage.

This reform optimizes the supply-side pressure of AAVE tokenomics and improves capital efficiency, but it is also necessary to pay attention to the potential impact of existing participants on the protocol during the transition period. For stkGHO holders, it may be necessary to seek new yield opportunities.