Aave, a leading decentralized lending protocol, is exploring a potential collaboration with the Lido Alliance. This move, if approved by the Aave DAO (decentralized autonomous organization), could significantly impact the staked Ether (stETH) market.

The Lido Alliance is a group focused on promoting infrastructure development for stETH, a token representing staked Ether on the Lido protocol. The alliance’s emergence comes amidst the rising popularity of EigenLayer, another Ethereum restaking protocol.

Why Aave is Eyeing the Lido Alliance

A proposal submitted by the Aave Chan Initiative outlines several potential benefits from joining the Lido Alliance. A dedicated stETH market within Aave V3 could enhance the user experience for Lido participants holding wstETH (wrapped stETH). This would potentially solidify Aave’s position as the go-to platform for Lido users.

Furthermore, the initiative highlights the ability to maintain a more competitive lending environment. A separate market would allow to offer higher borrowing rates for standard-wrapped Ethereum (WETH) without negatively impacting long-term users on the main Aave v3 platform.

The proposal also emphasizes the potential for attracting new liquidity through the Lido Alliance’s network and potential Merit Circle incentives. This could lead to increased Total Value Locked (TVL) within Aave, boosting its market share and overall revenue.

Safeguards and Community Support

The proposal outlines safeguards to manage risks associated with the new market. The borrowing capacity for WETH on the dedicated market would be capped at 90% of the supplied WETH. A risk steward would be responsible for adjusting this limit to ensure profitability for both stETH and WETH users. Additionally, the market would leverage a highly efficient mode with an interest rate of approximately 50 basis points.

The community appears to be receptive to the proposal. A recent temperature check vote overwhelmingly supported launching the dedicated stETH market. Aave founder Stani Kulechov echoed this sentiment, highlighting the flexibility of Aave V3 to cater to specific risk configurations based on evolving needs.

This potential collaboration between Aave and the Lido Alliance holds significant implications for the staked Ether market. If approved, it could lead to a more robust ecosystem for stETH, with stETH playing a central role in facilitating its use and growth.