Aave Umbrella officially passes: stkGHO APY 13% stablecoin mining collapse?

Author: @Web3Mario

Abstract: This week, the AAVE ecosystem passed a key proposal, and the long-awaited AAVE Umbrella module received community approval, which will be executed on June 5, 2025.

The AAVE Umbrella module will officially replace the original Safety Module, carrying the bad debt guarantee function of the AAVE ecosystem.

Personally, I have always been very fond of the original stkGHO yield scenario of the Safety Module, which allows for a stablecoin-based annual yield of 13% under controlled risk conditions, which is undeniably attractive.

However, the adoption of this proposal will bring a lot of changes to the yield paradigm of the original AAVE ecosystem, so I would like to summarize this article to introduce the specific impact of Aave Umbrella after its adoption and share it with you.

Overall, the launch of Aave Umbrella has optimized the supply-side pressure of AAVE tokenomics, enhancing capital efficiency from the project's perspective. However, it is necessary to observe the impact on the protocol during the transition of existing incentive scenario participants, and specifically for stkGHO participants, it may be necessary to explore other yield scenarios.

What problem does the Aave Umbrella module actually solve?

First, we need to introduce the significance of the Aave Umbrella module. We know that AAVE, as a decentralized over-collateralized lending protocol, has its core risk stemming from severe market fluctuations that can lead to a drastic decline in the value and liquidity of collateral, potentially triggering issues with bad debts due to untimely liquidations. Prior to Aave Umbrella, AAVE primarily relied on the Safety module to mitigate this risk. Simply put, it is a funding pool that can be tapped into to cover losses when the protocol faces bad debts. Of course, to incentivize the providers who bear the bad debt risk for the protocol, AAVE allocates relatively generous rewards.

In the Safety module, three types of funds are supported, AAVE, Liquidity Certificates BPT in Balancer AAVE / wstETHPool, and GHO. Users who hold these three tokens can stake their tokens into the Safety module to earn the official release of AAVE tokens. The pledged funds will be used to compensate AAVE in the event of bad debt problems, a process also known as "slashing". The first two assets have a maximum slashing ratio of 30%, while GHO has a maximum slashing ratio of 99%. In addition, the pledged funds need to go through a 20-day cooling-off period and a 2-day redemption period when redeeming, and will be re-pledged after the timeout.

This mechanism design has two benefits: in addition to alleviating the risk of bad debts in the protocol, the yield capability also brings use cases for related tokens, thereby creating demand for AAVE tokens and GHO. As of now, the total amount of funds in the Safety Module has reached $1.14B. Among them, the staked value of AAVE is $744M, the staked value of ABPT has reached $222M, and the staked value of GHO has reached $170M.

However, this mechanism mainly has two problems:

l Maintenance costs are too high;

l The capital efficiency is too low;

First of all, the cost that AAVE pays to attract this portion of funds is also astonishing. According to the current interest rate levels, the staking APR for stkAAVE is 4.57%, for stkGHO is 5.55%, and for stkABPT is 10.18%. We roughly estimate the annual incentive expenditure to be around $66M, and this part of the incentive comes from the issuance of additional AAVE, which puts considerable pressure on AAVE's market value maintenance.

Secondly, since the fund categories only involve AAVE tokens and GHO-related assets, considering AAVE as a blue-chip asset lending protocol, the core category of bad debts should be blue-chip assets, such as USDT, ETH, etc. When bad debts occur, relying on the current Safety module, it becomes necessary to sell off AAVE-related tokens or GHO to exchange for the bad debt assets to cover the shortfall, which also poses an additional challenge to the liquidity of AAVE and GHO. Therefore, it can be said that the capital efficiency reflected in the mitigation of bad debt risks in the fund pool constructed with high rewards is not very high.

To optimize these two issues, the AAVE team proposed Aave Umbrella as a replacement for the original Safety module. Simply put, Aave Umbrella has three main optimizations:

1. In terms of funding categories, aTokens with a higher correlation to protocol borrowing are used to absorb funds, and each aToken is only responsible for guaranteeing the corresponding underlying token, replacing the previous dependence on AAVE tokens and GHO-related tokens for all borrowings. In this upgrade, three new assets are mainly introduced: stkwaUSDC( staked wrapped aUSDC), stkwaUSDT, and stkwaETH.

2. The incentive distribution adopts a release curve model to determine the final staking yield of each asset, which will be influenced by three parameters: target liquidity, current total staking amount, and maxEmission. In simple terms, the release curve is a piecewise function:

( When the staked amount is insufficient to meet the preset target liquidity, the AAVE rewards distributed for each unit value of the staked token will increase, but the growth rate will slow down as it approaches the Target Liquidity, until it reaches maxEmission;

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

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

The overall change in APY follows the shape of the yellow line, representing a piecewise function. Of course, the main benefit of doing this is still in terms of capital efficiency, controlling the amount of safe funds within a reasonable range through interest rate adjustments, thereby avoiding excessive subsidies from the protocol. In this adjustment, various system parameters are shown in the figure, and note that the units are priced in the base token.

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

3. In the Slashing mechanism, the automatic execution at the smart contract level has replaced the proactive triggering that relied on DAO governance.

The first two points are even more important for DeFi users, as both the medium of yield and the yield have changed. Considering that the incentive adjustment of AAVE and ABPT adopts a gradual adjustment, we will mainly explain the impact of AAVE Umbrella with the change in the yield of stkGHO.

From 13% to 7.7%, the risk-reward model for GHO stakers has undergone a structural shift.

Due to the transition period provided for the adjustment of rewards for stkAAVE and stkABPT after this upgrade, the changes in rewards are not particularly significant, which is naturally a consideration to stabilize the demand and liquidity of AAVE. However, stkGHO in the new Umbrella module sees a significant decrease in GHO risk compensation yield: first, we calculate according to the latest interest rate model, combined with the current preset parameters:

)1( Target Liquidity: $12M

)2( maxEmissionPerYear: $1.2M

)3( The current total staking amount of stkGHO is $170M

Assuming that the current stkGHO stakers fully switch to the Umbrella module, the user's holding rate is only 0.56%, which is much lower than 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 about 7.7%, of course, provided that all stkGHO stakers fully switch to the Umbrella module, and considering the loss of funds, the actual yield will be larger than the changed value. The specific calculation can be calculated by referring to Desmos Link. Of course, the reduction of the yield is also accompanied by the reduction of the risk, and in the future, stkGHO stakers only need to bear the risk of bad debts of GHO loans.

So let's explore what the impact will be, it is foreseeable that the issuance of GHO will shrink significantly, the current GHO of 238M, of which the funds participating in stkGHO have reached 170M, accounting for about 71% of the total, which is a high pledge, which means that most of the current users' demand for GHO still comes from the staking income of stkGHO in the Safety module. A sharp drop in yields will inevitably mean a loss of GHO demand until a rebalancing of supply and demand is reached. However, there is no need to worry about the risk of a run in the process, because after all, the total collateral of GHO is currently at a very healthy level of more than 245%.

From the perspective of the AAVE protocol, this is a reassessment and adjustment of the unhealthy development model of GHO in the past stage, as the demand for GHO before was more based on governance token subsidies, rather than being supported by actual sustainable demand.

With this update, the AAVE team may be looking to enhance GHO's competitiveness by focusing more on the practical needs of decentralized stablecoins in payment mediums, anti-censorship, and improving the efficiency of lending protocols. However, it is lamentable that a legendary mining project may just disappear like this.