Aave DAO votes on a proposal to add USDT as collateral on Aave V3

On Wednesday, voting on a proposal to support USDT stablecoin as collateral on the Avalanche V3 market went live on Snapshot. As of press time, it appears Aave DAO was equally divided on implementing the idea.

Initiated by community member @luigidemeo88, the proposal argues that there was a need to add USDT as a stablecoin collateral on Aave V3 to increase diversity and “safeguard” against the inherent risks of a particular stablecoin failing. It is worth mentioning that USDT is currently enabled as collateral on V3 Avalanche but in isolation mode.

Stablecoins like DAI and USDC are currently enabled as collateral on Aave V3. However, there has been a longstanding sentiment that USDT poses additional risks that are not present in other stablecoins. Responding to these sentiments, the proposal states:

Tether has taken significant steps towards increased transparency. It should be seen as a positive that USDT & Tether are under heightened scrutiny, as opposed to many other assets and organizations that are not subject to the same extensive disclosure requirements and regularly undergo external auditing.

Analyzing the risks associated with Tether USDT, the proposal noted that the stablecoin is not just the oldest but also the most widely distributed in the market, having the highest market capitalization. In general, the risk analysis concluded that USDT has a similar risk profile to other stablecoins that are already listed and enabled as collateral on Aave.

Although the proposal did well to explain the position of USDT relative to other stablecoins, some members of the DAO had other views. Notably, Pauljlei provided Gauntlet’s risk assessments on the asset, which argued that the main risks that USDT poses to Aave if enabled as collateral was not market risk but rather other risks that are difficult to quantify. Some of these other risks include proof of reserves and counterparty risk.

The current controversy around the FTX crypto exchange appears to have swayed some community members to vote against the proposal. Deven Matthews wrote:

Blockchain at Berkeley voted against the snapshot proposal to add USDT as collateral. Given the ongoing insolvencies of centralized entities still unfolding- we are not confident at this time to onboard USDT as a collateral asset.

So far, 54.73% of the 1,669 votes are in support of the proposal. Meanwhile, voting will close on Saturday.