Aave V4 proposal puts DAO first to absorb Core Hub losses

TokenLogic on Sept. 11 proposed that Aave V4 place the DAO first in line to cover bad debt for the Core liquidity Hub on Ethereum for WETH, USDC and USDT. The proposal sets deficit offsets at 33 ETH for Core WETH, 15,000 USDC for Core USDC and 15,000 USDT for Core USDT.

Under the plan, the DAO would absorb that initial layer of losses. Any shortfall beyond those offsets would be covered by capital volunteered by independent underwriters. TokenLogic set underwriting targets of 800 ETH for Core WETH, 400,000 USDC for Core USDC and 400,000 USDT for Core USDT. The targets are sizing guides intended to cover an estimated six to eight weeks of expected loan growth and are configuration goals, not balances already committed.

Coverage would apply only to the specific reserve that receives deposits. USDC supplied to another Hub would not be protected by the Core USDC allocation. Eligibility includes all borrowing from each protected reserve, including loans originated through Spokes whose collateral may sit in other Hubs; those credit lines can still expose the Core reserve supplying the borrowed asset.

When underwriter capital is used to cover a deficit, the mechanism would burn supplied Hub shares. Until then, underwriters’ funds would continue to earn supply yield and receive additional rewards to compensate for risk. Underwriters would face a 20-day cooldown followed by a two-day withdrawal window; participants who miss the window must start another 20-day cooldown. Assets remain exposed to slashing risk during the cooldown while still earning rewards.

TokenLogic recommended excluding USDG and frxUSD from initial general-purpose coverage, citing uncertainty about incentive-sensitive lending activity and concern that underwriter participation could shift risk away from existing suppliers. The proposal also leaves several other Hub reserves outside the first phase for reasons such as limited incremental protection and narrow supplier bases. Those exclusions do not imply loans lack collateral or that losses are likely.

The proposal would cover the Core liquidity Hub on Ethereum if adopted. TokenLogic proposed monitoring conditions after activation and reassessing the framework after three months, with the option to extend coverage to excluded markets as lending activity and supplier diversity develop. The document defines bad debt as a situation where a borrower’s collateral is exhausted during liquidation but outstanding debt remains unpaid.