Aave Umbrella officially passes: stkGHO APY 13% stablecoin mine falls?

Author: @Web3Mario(

Summary: This week, the AAVE ecosystem passed a key proposal, and the AAVE Umbrella module, which has been in the making for a long time, has been recognized by the community and will be implemented on June 5, 2025. At this point, the AAVE Umbrella module will officially replace the original Safety Module and carry the bad debt guarantee function of the AAVE ecosystem. Personally, the author liked the original Safety Module’s stkGHO yield scenario very much before this, and it is not unpleasant to be able to get an annualized rate of return of 13% of the stablecoin standard under the condition of controllable risks. However, the adoption of this proposal will bring a lot of changes to the yield paradigm of the original AAVE ecosystem, so I would like to summarize this article to introduce the specific impact of Aave Umbrella after its adoption and share it with you. In general, through the launch of Aave Umbrella, the pressure on the supply side of AAVE tokenomics has been optimized, and the capital efficiency has been improved from the perspective of the project side, but it is necessary to observe the impact on the protocol caused by the transition process of the participants in the original incentive scenario, and it may be necessary to find other yield scenarios for stkGHO participants alone.

What problem does the Aave Umbrella module actually solve?

First of all, we need to introduce the significance of the Aave Umbrella module, we know that AAVE is a decentralized over-collateralized lending protocol, and the core risk comes from the fact that when the market fluctuates violently, resulting in a sharp decline in collateral value and liquidity, it may induce bad debts caused by untimely liquidation. Before Aave Umbrella, AAVE mainly mitigated this risk through the Safety module, which is simply a capital pool, when the protocol has bad debts, it can use the pool funds to make up for the loss of the protocol, of course, in order to subsidize this part of the fund providers who bear the risk of bad debts of the protocol, AAVE has allocated more generous incentives to it.

In the Safety module, three types of funds are supported, AAVE, Liquidity Certificates BPT in Balancer AAVE / wstETHPool, and GHO. Users who hold these three tokens can stake their tokens into the Safety module to earn the official release of AAVE tokens. The pledged funds will be used to compensate AAVE in the event of bad debt problems, a process also known as “slashing”. The first two assets have a maximum slashing ratio of 30%, while GHO has a maximum slashing ratio of 99%. In addition, the pledged funds need to go through a 20-day cooling-off period and a 2-day redemption period when redeeming, and will be re-pledged after the timeout.

This mechanism design has two benefits. In addition to alleviating the bad debt risk of the protocol, the yield capability also brings use cases for the related tokens, thereby creating demand for AAVE tokens and GHO. As of now, the total amount of funds in the Safety Module has reached $1.14B. Among them, the staking value of AAVE has reached $744M, the staking value of ABPT has reached $222M, and the staking value of GHO has reached $170M.

However, this mechanism mainly has two issues:

• Maintenance costs are too high;
• Low capital efficiency;

First of all, the cost of AAVE to attract that part of the funding is also staggering. According to the current interest rate level, the staking APR of stkAAVE is 4.57%, the staking APR of stkGHO is 5.55%, and the staking APR of stkABPT is 10.18%. Combined with TVL, we roughly estimate that the annual incentive expenditure is about $66M, and this part of the incentive is issued by AAVE, which puts a lot of pressure on the market value maintenance of AAVE.

Secondly, since the fund category only involves AAVE tokens and GHO-related assets, considering that AAVE is a blue-chip asset lending protocol, the core category of bad debts should be blue-chip assets, such as USDT, ETH, etc. When bad debts are generated, relying on the current safety module, they have to sell AAVE-related tokens or GHO back to bad debt assets to make up for the shortfall, which also brings an additional test to the liquidity of AAVE and GHO, so it can be said that the capital efficiency reflected in the risk mitigation of bad debts is not very high in the capital pool constructed with high rewards.

To optimize these two issues, the AAVE team proposed the Aave Umbrella as a replacement for the original Safety module. In simple terms, Aave Umbrella has three main optimizations:

1. In terms of funding categories, aTokens that are more closely related to protocol borrowing are used to absorb funds, and each type of aToken only guarantees the corresponding underlying token, replacing the previous reliance on AAVE tokens and GHO-related tokens for all borrowings. In this upgrade, three new assets are mainly introduced: stkwaUSDC( staked wrapped aUSDC), stkwaUSDT, and stkwaETH.

2. In the incentive distribution, the release curve model is used to determine the final staking yield of each asset. The interest rate will be influenced by three parameters: target liquidity, current total staking amount, and maxEmission. In simple terms, the release curve is a piecewise function:

When the staked amount is insufficient to meet the target liquidity, the AAVE rewards distributed for each unit of value of the staked tokens will increase, but the growth rate will slow down as it approaches the Target Liquidity, until it reaches maxEmission;

When the staked amount reaches the Target Liquidity and an excess threshold (possibly 20%), the AAVE rewards distributed for each unit value of the staked token will decrease linearly.

When the staked amount exceeds the threshold, the unit reward amount remains unchanged;

The overall APY changes follow the shape of the yellow line, representing a piecewise function. Of course, the main benefit of doing this lies in capital efficiency, controlling the amount of secure funds within a reasonable range through interest rate adjustments, avoiding excessive subsidies from the protocol. In this adjustment, the system parameters are shown in the figure, note that the units are priced in the base token.

The release adjustments for the original three tokens of AAVE are as follows:

! [Aave Umbrella Officially Passed: stkGHO APY 13% of Stablecoin God Mine Falls?] ](https://img.gateio.im/social/moments-41111b29f02cdf9dc8749492b9a5c074)

3. In the Slashing mechanism, the automatic execution at the smart contract level has replaced the original proactive triggering that relied on DAO governance.

The first two points are more important for DeFi users, as both the yield medium and yield rate have changed. Considering that the incentive adjustments for AAVE and ABPT have adopted a gradual approach, we will mainly explain the impact of AAVE Umbrella based on the changes in the yield rate of stkGHO.

( The risk-reward model for GHO stakers has undergone a structural change from 13% to 7.7%

Due to the upgrade, AAVE has provided a transitional period for the reward adjustments of stkAAVE and stkABPT. The changes in rewards are not particularly significant, which is naturally a consideration for stabilizing AAVE’s demand and liquidity. However, the GHO risk compensation yield has significantly decreased in the new Umbrella module: first, we calculated according to the latest interest rate model, combined with the current preset parameters:

)1(Target Liquidity: $12M

)2(maxEmissionPerYear: $1.2M

)3### The current total staked amount of stkGHO is $170M.

Assuming that the current stkGHO stakers fully switch to the Umbrella module, the user’s holding rate is only 0.56%, which is much lower than the current 5.55%. Of course, considering the 7.14% yield allocated to GHO users in the Merit module, the final yield may drop from the current 13% to about 7.7%, of course, provided that all stkGHO stakers fully switch to the Umbrella module, and considering the loss of funds, the actual yield will be larger than the changed value. The specific calculation can be calculated by referring to Desmos Link. Of course, the reduction of the yield is also accompanied by the reduction of the risk, and in the future, stkGHO stakers only need to bear the risk of bad debts of GHO loans.

So let’s explore what the impact will be, it is foreseeable that the issuance of GHO will shrink significantly, the current GHO of 238M, of which the funds participating in stkGHO have reached 170M, accounting for about 71% of the total, which is a high pledge, which means that most of the current users’ demand for GHO still comes from the staking income of stkGHO in the Safety module. A sharp drop in yields will inevitably mean a loss of GHO demand until a rebalancing of supply and demand is reached. However, there is no need to worry about the risk of a run in the process, because after all, the total collateral of GHO is currently at a very healthy level of more than 245%.

From the perspective of the AAVE protocol, this is a re-examination and adjustment of the unhealthy development model of GHO in the past, because before that, the demand for GHO was more based on governance token subsidies, and there was no actual sustainability demand to support it. After this update, perhaps the AAVE team will rebuild GHO’s competitiveness from the actual demand scenarios of decentralized stablecoins in payment media, censorship resistance, and improving the capital efficiency of lending protocols. But I have to sigh that a generation of divine mines may also disappear.