MakerDAO reduces exposure to Celsius, disables Aave DAI supply

In a move to reduce exposure to the embattled Celsius Network, MakerDAO has voted to temporarily disable the Direct Deposit Module (D3M) of DAI for DeFi lending platform Aave. Aave users will not be able to access DAI loans on Aave using stETH as collateral through the Direct Deposit Module.

MakerDAO is the organization behind the DAI stablecoin.

Through a tweet made on Thursday, MakerDAO announced that its community members had voted to temporarily suspend Aave DAI Direct Deposit Module.

The Maker Governance has voted to temporarily disable the @AaveAave DAI Direct Deposit Module (D3M).

This change is available for execution on June 17 2022 21:03 UTC.

🗳 https://t.co/3wKQiEvcMw

— Maker (@MakerDAO) June 15, 2022

According to the tweet, the outcome of the vote was to be executed from June 17 2022 21:03 UTC.

Reducing Maker’s exposure to Celsius

The governance proposal to disable DAI supply on Aave was put forward earlier this week in an attempt to reduce Maker’s exposure to the besieged crypto lending platform Celsius.

According to the governance proposal, the Target Borrow Rate will be set to zero in the smart contract responsible for D3M thus preventing further borrowing by Celsius using Aave’s D3M.

Part of the proposal read:

“This change is being proposed to temporarily disable the Aave D3M. The Aave DAI Direct Deposit Module (D3M) Target Borrow Rate (bar) will be set to 0”

How the Direct Deposit Module (D3M) works

The Direct Deposit Module (D3M) is the one that allows interactions between the Maker ecosystem and other third-party lending pools including Aave. The main objective of the D3M is to maintain DAI’s interest rate across the lending pools, especially on Aave.

Currently, Aave has a total exposure of 200 million DAI tokens through the D3M. Out of that, 100 million DAI tokens are borrowed by Celsius using stETH (a representation of ETH staked with Lido) collateral.

Celsius relationship with stETH

Celsius earlier this week indefinitely paused withdrawals, swaps, and transfers amid growing concerns about the crypto lender exposure to stETH. There was growing uncertainty on stETH due to the upcoming Ethereum merge that made stETH to lose its peg against ETH.

As a result, there was very heavy selling pressure on the stETH putting Celsius in a precarious position since it had locked customer funds into stETH.

If the worst comes to the worst and Celsius becomes insolvent and faces a margin call, it would be forced to dump its stETH; something that would cause the stETH to de-peg further from ETH. This would mean the 100 million DAI tokens that MakerDAO had lent to Celsius would become irrecoverable.

To protect their lending power and prevent Celsius from borrowing more DAI tokens using stETH as collateral, MakerDAO has voted to temporarily disable the D3M.

According to a proposal referred to as “proposal 83, following the disabling of D3M, Aave is also considering freezing stETH and its use as collateral on the platform.