Aave V2 Community to Evaluate Small-Cap Stablecoins

A new proposal to remove stablecoins like USDP and GUSD from Aave V2 is scheduled for voting by the Aave community. 

The Aave community is preparing to vote on a ChaosLabs proposal for deprecating several small-cap stablecoins on Aave V2, including Paxos USD (USDP) and Gemini Dollar (GUSD).

ChaosLabs states in the proposal description that Aave needs to “reduce its V2 exposure to lesser-used stablecoins, many of which have limited liquidity, thus allowing for price manipulation and other potentially harmful events” in response to “recent events.” 

In order to address concerns about less popular stablecoins—which, because of their limited liquidity, can be subject to price manipulation—the proposal lays out a staged approach.

According to ChaosLabs, the suggested strategy would turn off borrowing for USDP, GUSD, LUSD, FRAX, and sUSD and modify base rates and reserve factors, among other things, “to encourage borrowers to repay their loans.” 

Although the community has reached a consensus, the proposal still needs to go through a snapshot vote until May 6 to be approved. An Aave Improvement Proposal (AIP) to implement the suggested improvements will be submitted after the vote.

The plan comes after the price of USDP has recently surged on several exchanges, including Binance and Coinbase, with reports from the Chainlink Oracle pointing to a top above $1.20.

Even though USDP was not used as collateral, it could still be borrowed against Aave V2 on Ethereum, which led to liquidations and bad debt lawsuits.