Aave V4 Proposal Puts DAO Funds First in Line for Losses

A fresh proposal from TokenLogic aims to protect lenders on Aave V4 by introducing a bad debt backstop for specific markets on Ethereum. Under the plan, suppliers using the Core liquidity hub for wrapped Ether, USDC, and USDT would receive extra security. The system places the Aave DAO first to absorb potential losses, followed by volunteer underwriters.

The framework outlines specific targets for the underwriting pools to support expected loan growth over several weeks. If liquidations fail to cover a borrower's debt, the DAO covers an initial layer of the deficit. Volunteer underwriters then step in to cover any remaining losses using committed capital that continues earning yield until needed.

Participants who choose to underwrite these markets face strict exit rules, including a twenty day cooldown period and a narrow withdrawal window. During this time, their staked assets remain exposed to potential slashing risks. TokenLogic plans to monitor the system closely and reassess the framework after three months of operation.