Aave V4 proposal prioritizes DAO funds for lending loss absorption

Aave V4 lenders providing wrapped Ether (WETH), USDC, or USDT to its Core liquidity Hub on Ethereum would receive a bad-debt backstop under a proposal from TokenLogic. The plan places Aave's DAO first in absorbing losses, followed by volunteer underwriters, and limits initial coverage to these three lending markets. Proposed targets for underwriting are 800 ETH for Core WETH, 400000 USDC for Core USDC, and 400000 USDT for Core USDT, sized for six to eight weeks of expected loan growth. Coverage for Core USDC does not extend to USDC supplied to another Hub. Bad debt occurs when liquidation exhausts a borrower's collateral but leaves debt unpaid. Under the proposed framework, Aave's DAO would absorb an initial layer through deficit offsets: 33 ETH for Core WETH, 15000 USDC for Core USDC, and 15000 USDT for Core USDT. Umbrella underwriters could lose their committed capital to cover deficits beyond that layer. Eligibility for coverage includes all borrowing from each protected reserve, including loans from Spokes. Underwriters face a 20-day cooldown and a two-day withdrawal window when exiting. TokenLogic does not recommend initial coverage for USDG or frxUSD due to uncertainty over lending activity and underwriter attraction. The proposal suggests monitoring conditions after activation and reassessing the framework after three months.

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