Aave V4 proposal would put DAO funds first in line to absorb lending losses

Aave’s upcoming V4 upgrade includes a proposal from TokenLogic that would give lenders supplying wrapped Ether (WETH), USDC or USDT to the Core liquidity Hub a bad‑debt backstop. The plan places the Aave DAO’s funds as the first layer of loss absorption, followed by volunteer underwriters.

Targeted protection for core markets

The proposal sets underwriting targets of 800 ETH for Core WETH, 400,000 USDC for Core USDC and 400,000 USDT for Core USDT. These amounts are sized for six to eight weeks of expected loan growth and represent targets, not already‑committed capital.

How losses would be covered

When a borrower’s liquidation does not fully cover the debt, the DAO would initially offset the deficit with:

• 33 ETH for Core WETH
• 15,000 USDC for Core USDC
• 15,000 USDT for Core USDT

If losses exceed these offsets, underwriters would cover the shortfall using their committed capital, which continues to earn supply yield until needed. Coverage is implemented by burning the supplied Hub shares, and participants receive additional rewards for assuming the risk.

Eligibility and scope

All borrowing from each protected reserve, including loans originated through Spokes (where collateral resides in other Hubs), would be covered. However, protection is limited to the specific reserve receiving the deposit; for example, Core USDC coverage does not extend to USDC supplied to other Hubs.

Underwriter exit constraints

Underwriters face a 20‑day cooldown period followed by a two‑day withdrawal window for each market. Missing the window requires starting another cooldown, extending the wait by another 20 days. During cooldown, staked assets remain exposed to slashing while still earning rewards, meaning the extra yield carries both capital‑loss risk and reduced liquidity.

Exclusions and future reassessment

The proposal does not initially cover USDG or frxUSD, citing uncertainty around incentive‑sensitive lending activity and a concentrated supplier base for frxUSD. Other Hubs are also excluded for reasons such as limited incremental protection and narrow supplier bases. TokenLogic plans to monitor conditions for three months after activation and may reconsider excluded markets as lending activity matures and supplier bases diversify.