Simply summary

Proposal for the Aave governance to approve to initial activation of the Aave Umbrella system, focusing on Aave v3 Core Ethereum before expanding to other pools and networks.

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Motivation

Aave Umbrella is a replacement for the Aave Safety Module acting as a decentralised staking & coverage by slashing mechanism for potential losses in Aave pools. With Umbrella, instead of staking AAVE, ABPT (Balancer AAVE/wstETH LP), users will use Aave aTokens (aUSDC, aUSDT, etc) of each pool while keeping GHO, given these are the most efficient assets for coverage.

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Specification

For full context it is highly recommended that voters visit and read the associated Aave governance forum post, but in summary, the proposal will do the following:

• Activating all Umbrella core and peripheral systems to start staking of assets to cover the biggest Aave v3 pool: v3 Core Ethereum.
• Do some changes on the legacy Safety Module instances, to start a progressive deprecation of it.

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Umbrella side

• The initial assets on Umbrella (v3 Core Ethereum) and their configurations will be the following.

Staked asset	Covered asset	Target Liquidity *	Max emission (rewards at target liquidity)	Umbrella APY range (up until excess liquidity) **	Total APY (Aave + Umbrella)***	Cooldown/unstake window	Deficit offset
aUSDC (wrapped)	USDC	66’000’000 USDC	2’330’000 aUSDC/year	1.76%-7.06%	6.8%-12.5%	20/2 days	100’000 aUSDC
aUSDT (wrapped)	USDT	104’000’000 USDT	3’670’000 aUSDT/year	1.76%-7.06%	6.8%-12.5%	20/2 days	100’000 aUSDt
aWETH (wrapped)	WETH	25’000 ETH	550 aWETH/year	1.1%-4.4%	3%-6.3%	20/2 days	50 aWETH
GHO	GHO	12’000’000 GHO	1’200’000 aGHO/year	5%-20%	5%-20%	20/2 days	100’000 GHO

*Target Liquidity is denominated in the contracts in wrapped aTokens, increasing over time in exchange rate. That means the Target Liquidity itself will grow slightly over time. For the sake of simplicity, the number on the table is in equivalent terms of underlying (USDC, USDT, WETH), not in wrapped aTokens ** Umbrella has an upper limit of APY as max emission is capped, but technically no lower limit. However, going over the table’s lower point of APY would mean there are way more deposits than expected, hence the market pricing “cheaper” the risk of staking. *** 1y average supply rates for each asset on Aave are taken as reference

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Additionally, the following aspects are important on highlight in the Umbrella side:

• Set as Rewards Admin the Aave Finance Committee, with a timelock of 1 day. This will be done by introducing a new Permissioned Payloads Controller, mirroring the architecture of the execution layer of the Aave Governance, but oriented to less critical flows like rewards updates.
• Set the Aave Ethereum Collector as the reward payer: the address from which rewards will be distributed. The configured allowance will be 50% of the defined yearly budget, which will allow enough but controlled flexibility for the Finance Committee to increase rewards during the initial month. At any point, the Aave governance can modify this as required.
• All outstanding deficits on assets to be covered by the initial Stake tokens will be “cleaned” with Collector funds on the AIP. The current aggregated deficit is up to ~$600 in USDC, USDT, WETH, and GHO, we don't expect these numbers to grow meaningfully before AIP.
• A DeficitOffsetClinicSteward smart contract will be given an allowance from the Aave Collector up to the Deficit Offset configured for each asset. This will allow the Aave Finance Committee to trigger deficit offset coverage without going through a governance proposal.
• The Deficit Offsets proposed are substantially above the bad debt levels historically accrued on Aave v3 Core on the covered assets. That means said offsets act as a very substantial “tranche” that should protect stakers from slashing under normal conditions.
• Stake Umbrella tokens, as by design, will cover exclusively the deficit created on the associated borrowed assets on Aave v3 Core Ethereum: Staked aUSDC will cover exclusively the deficit on USDC, staked GHO exclusively the deficit on GHO, and so on.
• A transfer of $249'000 will be done to BGD Labs, to cover the incurred audit cost of all Umbrella's smart contracts by StErMi, MixBytes and Ackee.

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Legacy Safety Module side

• The new configurations for the legacy Safety Module will be the following.

Staked asset	Rewards/day (AAVE)	Rewards/year (AAVE)	Rewards/year ($)	Average total staked ($)	Slashing eligibility	Total Slashable ($)	Swap effectivity (inverse slippage)	Effective coverage ($)
AAVE	315 AAVE	114'975 AAVE	22’995’000	500’000’000	20%	100’000’000	85%	85’000’000
AAVE/wstETH Balancer v2	216 AAVE	78’840 AAVE	15’768’000	162’000’000	20%	32’400’000	90%	29’160’000
GHO	0	0	0	0	0	0	0	0

*Merit incentives will not be touched on the legacy stkGHO, and coverage incentives will be moved to the new stkGHO. *AAVE price $200 avg for the modelling

• Additionally, legacy stkGHO's cooldown will be removed, which combined with the removal of slashing too will make the asset as a temporary sGHO.

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Disclosures

BGD Labs has developed the software of Umbrella within its scope for services with the Aave DAO, but any decision to activate them will be up to the Aave governance. In addition, Umbrella is a decentralised system running on the blockchain, not by BGD Labs or any other centralised entity.

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Next steps

If this ARFC gets approved, the next step will be the on-chain voting by AAVE holders on the activation of the system on Ethereum.