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A New Proposal for Aave (AAVE) Community: Enabling sUSD Collaterals

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Yesterday, April 22nd, saw the arrival of a new proposal that was set before the Aave’s decision-making community. Now, users who engage in the project’s governance are to decide whether or not they believe that the proposal should be implemented.

According to a Twitter user MattLosquadro, who is also a community member who posted the proposal, the proposal is advocating for enabling sUSD as collateral on Optimism.

Details about the proposal

MattLosquadro announced in a tweet yesterday that he posted an Aave proposal to enable sUSD as collateral on Optimism, noting that sUSD is the most used stablecoin on OP and that it is used for trading on a number of other platforms, including Synthetix, Kwenta, Lyra, Thales, as well as Polynomial Protocol.

Optimism is a Layer 2 Optimistic Rollup network that was designed to utilize the strong security guarantees of Ethereum while reducing issues like latency and cost. It is also EVM equivalent, making the transition from L1 to L2 fairly simple and seamless.

MattLosquadro noted that “this is long overdue,” sharing the link to the Aave governance page that features his proposal.

In the proposal, he explains his stance in greater depth. Noting that the sUSD market cap has grown tremendously over the past year, and that there is a steady demand for decentralized stablecoins, which had a significant impact on the token’s growth. The token is slightly overcollateralized by the governance token SNX.

However, the rise of its liquidity all across DEXes has contributed to sUSD stability in 2021, which, in turn, allowed collateral use for promoting its liquidity in Aave markets.

The proposal explains that SNX stakers are incentivized to actively manage their debt, relative to the size of their stake. Sometimes, there are spikes in demand for sUSD on various markets where it is present, which includes Aave. When this happens, it may cause smaller deviations from the peg, meaning that the stablecoin still sees smaller price fluctuations. However, they are still quite small, and the price returns to normal sooner or later.

No downsides to enabling sUSD collaterals

The post further says that underlying functions in relation to sUSD are fundamentally the same as that of SNX. Also, both SNX and sUSD contracts are fully upgradeable, so the project won’t be losing anything by switching to sUSD from that point of view, either.

One thing to note is that all changes will have to go through a formal governance process from SIP to deployment, but that would be announced well before the upgrades, so it doesn’t present a counter-party risk. Finally, the post notes that the sUSDv2CRV pool has deep liquidity on L1, and with incentives, the same will be true for the L2 pool.

Besides, there are other synth pools on Curve in addition to sUSD, whose emission gauges to supplement sUSD liquidity. Meanwhile, all synths are redeemable at their dollar value in sUSD, at the prices quoted at Chainlink.

The Aave community so far responded quite well to the proposal, with many votes of support. It is likely that the decision will be made to go through with the proposal and to implement sUSD collaterals, as the post explained the situation rather well, showing that there are no real downsides to making this move.

To learn more visit our Investing in Aave guide.

Ali is a freelance writer covering the cryptocurrency markets and the blockchain industry. He has 8 years of experience writing about cryptocurrencies, technology, and trading. His work can be found in various high-profile investment sites including CCN, Capital.com, Bitcoinist, and NewsBTC.

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