Aave community to review small-cap stablecoins on Aave V2

The Aave community is set to vote on a new proposal to remove stablecoins like USDP and GUSD from Aave V2.

The Aave community is gearing up to vote on a proposal by ChaosLabs, which suggests deprecating multiple small-cap stablecoins, including Paxos USD (USDP) and Gemini Dollar (GUSD) on Aave V2.

In the description of the proposal, ChaosLabs says the move should be made in response to “recent events,” which have highlighted the need for Aave “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.”

The proposal outlines a phased approach, aiming to address concerns regarding lesser-used stablecoins, which can be susceptible to price manipulation due to their limited liquidity. ChaosLabs says that under the proposed plan, borrowing for USDP, GUSD, LUSD, FRAX, and sUSD would be disabled, and various parameters, including reserve factors and base rates, would be adjusted “to encourage borrowers to repay their loans.”

While consensus has apparently been achieved within the community, the proposal still needs to undergo a snapshot vote until May 6 for final approval. Following the conclusion of the vote, an Aave Improvement Proposal (AIP) will be submitted to implement the proposed updates.

The proposal follows a recent surge in USDP’s price across various exchanges, including Coinbase and Binance, with reports from the Chainlink Oracle indicating a peak above $1.20. Despite USDP not serving as collateral, it remained a borrowable asset on Aave V2 on Ethereum, resulting in liquidations and generating cases of bad debt.