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Aave Community Considers Removal of Small-Cap Stablecoins from Aave V2

The Aave community is embarking on a pivotal decision-making process as it prepares to vote on a proposal aimed at removing certain small-cap stablecoins, such as Paxos USD (USDP) and Gemini Dollar (GUSD), from Aave V2.

Proposed by ChaosLabs, the initiative is driven by recent events that have underscored the importance of mitigating exposure to less-utilized stablecoins within Aave V2. ChaosLabs argues that these stablecoins, characterized by limited liquidity, pose a risk of price manipulation and other adverse outcomes.

Outlined in the proposal is a phased strategy designed to address concerns surrounding these lesser-known stablecoins. It entails disabling borrowing capabilities for USDP, GUSD, LUSD, FRAX, and sUSD, while simultaneously adjusting various parameters, including reserve factors and base rates, to incentivize borrowers to repay their loans promptly.

While the proposal appears to have garnered consensus within the Aave community, it still awaits final approval through a snapshot vote scheduled until May 6. Upon the conclusion of this voting period, an Aave Improvement Proposal (AIP) will be formally submitted to enact the proposed adjustments.

The impetus for this proposal stems from a recent surge in USDP’s price observed across multiple exchanges, including notable platforms like Coinbase and Binance. Reports from the Chainlink Oracle indicated that USDP’s value peaked above $1.20. Despite not serving as collateral, USDP remained a borrowable asset on Aave V2, leading to instances of liquidations and resulting in cases of bad debt.

As the Aave community navigates this critical decision-making process, the proposal underscores the ongoing efforts to enhance the stability and resilience of the Aave ecosystem in response to evolving market dynamics and risk factors.

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