Aave Proposes Freezing BUSD On DeFi Platform

Republished By Plato

Followers: 0

DeFi lending protocol Aave is weighing a proposal to freeze BUSD stablecoin deposits on the platform.

A governance proposal put forth by community member MarcZeller on Monday calls for Aave to freeze the BUSD reserve on the V2 Ethereum market.

In light of the New York State Department of Financial Services’ order for Paxos to stop minting BUSD, and an impending SEC lawsuit, the proposal argues that BUSD’s circulating supply will tend toward zero over time.

“As there’s no real prospect of growth and the inability to mint new BUSD might hurt peg arbitrage opportunity and asset peg. It seems that the most reasonable path for Aave is to freeze this reserve and invite users to switch to another stablecoin among the diversity present in Aave,” wrote MarcZeller.

He went on to note that the protocol wasn’t at immediate risk, so a fast-track process for the proposal wouldn’t be necessary.

Initial comments from community members suggest the proposal is likely to go forward. Aave’s risk management firm Gauntlet and crypto market maker Wintermute signalled their support for freezing BUSD on Aave.

BUSD lost its peg to the U.S. dollar and dipped to a low of $0.9988 on Monday as investors moved their funds to other stablecoins.

According to Nansen’s Andrew Thurman, DeFi ecosystems using BUSD on blockchains like Ethereum will have little to worry about, considering only a small amount of liquidity pools are denominated in the Paxos-issued stablecoin. It’s a different story, however, for the protocols built on Binance Smart Chain.

Many of the top Binance Smart Chain / $BNB liquidity pools are denominated in $BUSD

On Ethereum, BUSD withering away won’t have much an impact on DeFi — just $11 milly on Aave, for instance.

On BNB, meanwhile, a whole ecosystem will have to pivot to a new source of liquidity pic.twitter.com/NnWAZFA8iT

— Andrew T (@Blockanalia) February 13, 2023

“I think that Binance is heavily focused on BUSD, and it’s always been debatable — at best — to what degree Binance Smart Chain is a legitimately independent technological entity. I think Binance’s struggles to switch will be BNB’s struggles to switch,” he said.

Binance CEO Changpeng Zhao said the exchange would continue to support BUSD for the “foreseeable future,” but will make product adjustments as users migrate away from the stablecoin.