Major Update for AAVE Ecosystem: The Umbrella Module Will Replace the Safety Module

The AAVE ecosystem recently passed a key proposal, and the highly anticipated AAVE Umbrella module has gained community approval, with plans for formal implementation on June 5, 2025. This means that the AAVE Umbrella module will officially replace the existing Safety Module, taking on the role of bad debt guarantee for the AAVE ecosystem. This move will bring significant changes to the revenue model of the AAVE ecosystem.

Core Issues Solved by the Umbrella Module

AAVE, as a decentralized over-collateralized lending protocol, faces the main risk of a sharp decline in collateral value due to market volatility, leading to bad debts caused by delayed liquidations. Previously, AAVE primarily relied on the Safety Module to mitigate this risk. The Safety Module is essentially a fund pool that can be tapped into to cover losses when the protocol experiences bad debts. To attract fund providers, AAVE offers generous incentives.

The Safety Module supports three types of assets: AAVE, Balancer AAVE/wstETH pool BPT tokens, and GHO. Users can stake these assets to earn AAVE token rewards while bearing a "slashing" risk of up to 30%-99%. As of now, the total locked amount in the Safety Module has reached $1.14 billion.

However, this mechanism has two major problems: first, the maintenance costs are too high, and second, the capital efficiency is low. The annual incentive expenses alone amount to about $66 million, putting pressure on AAVE's market value. Moreover, the current mechanism is not very efficient in handling bad debts, which may impact the liquidity of AAVE and GHO.

To optimize these issues, the AAVE team proposed the Umbrella module. Its main optimizations include:

1. Use aTokens with higher correlation to the borrowed assets as collateral funds, with each aToken responsible for the collateral of the corresponding asset.

2. Introduce the release curve model to determine the staking yield of each asset, dynamically adjusting through parameters such as target liquidity.

3. Change the Slashing mechanism from being triggered by governance to being automatically executed by smart contracts.

These optimizations aim to improve capital efficiency and control the level of protocol subsidies.

Significant Changes to the GHO Staking Yield Model

Compared to the gradual adjustments of AAVE and ABPT, the changes faced by GHO stakers are more significant. According to estimates from the new model, if all current stkGHO stakers switch to the Umbrella module, the yield will drop from around 13% to about 7.7%. This decline is primarily due to a substantial decrease in the risk compensation yield of GHO in the Umbrella module.

The significant decline in yield may lead to a substantial shrinkage in GHO issuance. Currently, about 71% of the total GHO supply comes from stkGHO staking, which means that the current demand for GHO is primarily driven by the high staking rewards from the Safety Module. A decrease in yield is bound to trigger a loss of demand until supply and demand are rebalanced. However, due to the healthy collateralization rate of GHO, the risk of a run is relatively controllable in the short term.

From the perspective of the AAVE protocol, this is a re-examination and adjustment of the GHO development model. Previously, GHO's demand was overly reliant on governance token subsidies, lacking sustainable support. After this update, the AAVE team may focus more on the practical application scenarios of decentralized stablecoins to reshape GHO's competitiveness. However, this also means that a popular high-yield staking opportunity is about to come to an end.