Aave Governance Refocuses on Profitability: Dropping USDS Collateral and Shuttering Low‑TVL v3 Deployments

Aave has entered a new phase of strategic discipline.

After years of aggressive multichain expansion and broad collateral onboarding, governance is now prioritizing profitability, capital efficiency, and risk‑adjusted returns. Two recent moves make that shift explicit:

• Removing Sky’s USDS stablecoin as collateral across Aave deployments, despite its long‑standing presence and integrations.
• Moving to shut down “underperforming” Aave v3 instances on zkSync, Metis, and Soneium, which together represent a negligible share of TVL and revenue.

Both decisions passed (or are set to pass) with overwhelming support. The USDS proposal received about 99.5% approval; the chain shutdown proposal is trending toward near‑unanimous backing. These are structural choices, not minor parameter tweaks, and they reset how Aave thinks about assets, chains, and capital allocation.

1. Fundamentals: Aave’s Place In The DeFi Lending Stack

Aave is one of DeFi’s core money markets. It has grown from a single Ethereum pool into a multi‑chain, multi‑instance ecosystem spanning v2 and v3 deployments across several L1s and L2s.

By late 2025, a few fundamentals frame any governance decision:

• Scale and dominance

  • TVL reached about $41.85 billion by September 2025.
  • TVL grew roughly 52% in Q2 2025, versus ~26% for DeFi broadly.
  • Aave controls roughly 60–62% of the lending market, up from historical levels closer to 40%.

• Revenue and usage

  • Cumulative borrows exceed $775 billion.
  • Annualized protocol revenue sits in the tens to hundreds of millions, with one dataset citing about $174 million across 16 networks and another citing roughly $94 million in annualized lending revenue.

• Network concentration

  • Ethereum mainnet generates about $142 million in annual revenue, or roughly 81.1% of Aave’s total.
  • Most of the remainder comes from a few L2s and sidechains: Arbitrum, Optimism, Polygon, Base, and Avalanche.

Beyond the core lending market, Aave is building adjacent products:

• GHO stablecoin – A native overcollateralized stablecoin with a market cap around $312 million and ambitions for institutional and cross‑chain adoption.
• Real‑world assets (RWA) – Horizon, a permissioned RWA lending market, aims at institutional credit and off‑chain collateral.
• Protocol upgrades – Work on Aave v4 targets better capital efficiency, risk management, and modularity.

Aave is not a marginal protocol fighting for relevance. It is a systemically important DeFi primitive with meaningful profitability. That financial strength gives governance room to say no-to assets and chains that don’t clear its evolving bar.

2. The USDS Collateral Removal: Economics vs Asymmetric Risk

2.1 What Changed With USDS On Aave

USDS (formerly DAI under MakerDAO’s Sky rebrand) was once a central stablecoin in DeFi and a key part of Aave’s collateral set. Over time, its role and economics on Aave deteriorated.

A November 2025 proposal led by the Aave Chan Initiative (ACI) laid out the numbers:

• Revenue collapse

  • Q1 2025: USDS‑related revenue across Aave instances (including Cove and Prime) was about $244,153.
  • Q4 2025: that fell to roughly $17,776 for the quarter.
  • Implied annualized Q4 run‑rate: around $135,260.

• Relative insignificance

  • With Aave v3 generating around $174 million in annual revenue across 16 networks, USDS contributed under 0.1%.
  • Despite that, USDS still had full collateral status on Ethereum Core with a 75% LTV and eMode access.

Utilization was modest. About 18.04% of total USDS supply was deployed as collateral on Ethereum Core, much of it tied to yield‑farming and recursive loops rather than organic borrowing demand.

On the P&L, USDS was a rounding error. Yet it enjoyed full collateral privileges-and with them, systemic implications if something went wrong.

2.2 The Asymmetric Risk Argument

The core concern was not an immediate technical flaw in USDS, but asymmetric structural risk created by Sky’s evolving design:

• Sky introduced “Stars” such as Spark and Grove-internal lending and yield protocols within the Sky stack.
• These Stars were viewed as having access to low‑ or zero‑cost credit lines and complex strategies around USDS and related assets.

From Aave’s perspective, that created a simple imbalance:

• Sky captured upside from USDS issuance and leverage within its own ecosystem.
• Aave absorbed part of the downside if USDS, used as collateral, faced stress, depegging, or liquidity shocks.

USDS, in other words, imposed non‑trivial tail risk on Aave for almost no economic benefit. Governance and risk providers argued that this risk/reward profile was no longer acceptable.

Broader concerns about stablecoin leverage and liquidity reinforced the view:

• Stablecoins used as collateral in lending protocols can amplify reflexive leverage.
• Issuers like Sky face liquidity risk if redemptions outstrip liquid reserves, with stress propagating into DeFi money markets.

Against this backdrop, Aave had to ask whether it made sense to let USDS remain a high‑LTV collateral asset. The conclusion was no.

2.3 Governance Outcome And Parameter Changes

The proposal moved through Aave’s usual process:

• ARFC (Aave Request for Comments) – Open discussion with the community and risk providers.
• Snapshot vote – The proposal received about 99.5% approval off‑chain.
• AIP (Aave Improvement Proposal) – On‑chain implementation, either completed or scheduled.

The changes are straightforward:

• LTV set to 0% for USDS across Aave deployments

  • USDS can no longer be used as collateral.
  • Positions relying on USDS collateral must unwind or migrate.

• Reserve factor raised from 10% to 25% for USDS borrowing

  • A larger share of interest goes to the protocol treasury.
  • For the same borrow volume, Aave’s revenue from USDS borrowing rises by about 150%.

• USDS removed from eMode configurations

  • High‑efficiency looping strategies using USDS are disabled.

USDS remains a borrowable asset. Users can still tap USDS liquidity, but cannot lever it as collateral. Aave preserves some fee flow while cutting off the main contagion channel.

2.4 Sky’s Response And The Possibility Of Reversal

Rune Christensen, MakerDAO founder and a central figure at Sky, publicly pushed back on elements of Aave’s framing:

• He argued that Stars like Spark and Grove paid reasonable rates and honored obligations.
• He claimed the vote reflected misunderstandings of Sky’s internal mechanics.
• He suggested USDS could regain collateral status once Sky improved transparency and scalability via the Data Hub, Grove, and the Sentinel Network.

For Aave, the issue is less about Sky’s intentions and more about control and alignment:

• Aave does not govern USDS issuance, risk parameters, or internal credit lines.
• It does govern protocol solvency and user collateral safety.
• With USDS contributing less than 0.1% of revenue, the tolerance for external, opaque structural risk is low.

The door is not formally closed. But the signal is clear: collateral status, even for large stablecoins, must be justified on a risk‑adjusted, revenue‑aware basis-not presumed.

3. Shuttering Low‑TVL v3 Deployments: The End Of Multichain Maximalism

3.1 The zkSync, Metis, And Soneium Decision

Alongside USDS changes, governance advanced a proposal to wind down v3 deployments on:

• zkSync
• Metis
• Soneium

These instances share key traits:

• Together they represent about 0.05% of Aave’s total TVL.
• They generate minimal revenue, estimated at roughly $3,000–$50,000 in annualized revenue combined.
• User bases and liquidity are thin versus Aave’s core networks.

By comparison, Ethereum alone brings in about $142 million annually, more than 80% of protocol revenue. Major chains like Arbitrum, Optimism, Polygon, Base, and Avalanche each contribute far more than the three long‑tail networks.

Economically, zkSync, Metis, and Soneium are irrelevant to Aave’s bottom line. Maintaining them still carries non‑zero cost.

3.2 The Hidden Costs Of Long‑Tail Deployments

Even a quiet, exploit‑free deployment consumes resources:

• Security and monitoring

  • Each chain must be watched, patched, and occasionally audited to keep pace with core code.
  • A bug or integration failure on any chain risks reputational and financial damage.

• Development and maintenance

  • Engineers must support upgrades, parameter changes, and local integration (bridges, oracles, rollup specifics).

• Operational overhead

  • Every instance adds surface area for governance, risk reviews, and parameter proposals.
  • Risk providers and delegates must track metrics and threats per chain.

• Opportunity cost

  • Time spent on low‑impact chains is time not spent strengthening core deployments or high‑potential expansions.

Governance discussions framed this as a move away from “multichain maximalism” toward “fewer chains, done well.” The point is not to abandon multichain entirely, but to be more selective and data‑driven about where Aave stays active.

3.3 Economic Thresholds For New Chains

The same governance arc that targeted zkSync, Metis, and Soneium introduced a clearer economic bar for new deployments:

• New chains should show a credible path to at least $2 million in annual revenue before approval.

This is a sharp break from the 2020–2022 era, when protocols raced to every new L1 or L2 for “first mover” status regardless of eventual economics.

Under this approach:

• Chains unlikely to reach $2 million in annual revenue will struggle to get onboarded.
• Underperforming existing chains may face:
  • Higher reserve factors to extract more protocol revenue.
  • Eventual sunset proposals if economics remain weak.

Shutting down zkSync, Metis, and Soneium is both cleanup and signal: past expansion choices are no longer sacrosanct, and future ones must meet stricter thresholds.

3.4 Liquidity Fragmentation vs Depth

The consolidation also targets a familiar trade‑off: breadth vs depth.

• Spreading liquidity across many small pools and chains tends to produce:

  • Thin order books.
  • Higher slippage.
  • Noisy, less reliable interest rate dynamics.

• Concentrating liquidity on fewer, high‑usage chains supports:

  • Deeper pools.
  • Tighter spreads and better pricing.
  • Higher capital efficiency for lenders and borrowers.

Governance commentary pointed to fragmented markets and thin order books on marginal chains as real user‑experience problems. Exiting long‑tail deployments is meant to improve liquidity and predictability where Aave actually matters.

Across DeFi, chain count is losing status as a headline metric. Depth, efficiency, security, and sustainability are taking its place.

4. Revenue, On‑Chain Metrics, And Capital Allocation

4.1 Where Aave Actually Makes Its Money

The USDS and chain shutdown moves are easier to understand through Aave’s revenue concentration.

For 2025:

• Total v3 revenue across 16 networks is around $174 million annually.
• Ethereum mainnet contributes about $142 million, or 81.1%.
• The remaining ~19% comes mostly from:
  • Arbitrum
  • Optimism
  • Polygon
  • Base
  • Avalanche

Long‑tail deployments like zkSync, Metis, and Soneium contribute well under 1%-roughly $3,000–$50,000 per year in aggregate.

On the asset side, most lending revenue comes from:

• ETH, WBTC
• Major stablecoins (USDC, USDT)
• A limited set of other assets

USDS, at a projected ~$135,000 annual run‑rate, is similarly negligible.

Increasingly, governance is treating listings and deployments as a portfolio allocation problem:

• Maximize revenue and user value per unit of risk and operational cost.
• Stop subsidizing assets or chains whose risk and overhead greatly exceed their economic contribution.

4.2 Institutional Capital And Discipline

Institutional participation reinforces the shift:

• Aave has drawn about $410 million in institutional inflows and facilitated around $19 billion in redeployments across institutional strategies.
• Aave rates now function as reference yields for DeFi and plug into institutional products.
• Horizon (RWA markets) and GHO both target more regulated, sophisticated capital.

These users expect:

• Clear, transparent risk frameworks.
• Predictable behavior during stress.
• Governance that favors solvency and durability over political or narrative wins.

Dropping USDS collateral and exiting uneconomical chains signals that Aave is willing to forgo marginal growth and goodwill to protect the core.

4.3 GHO And Internal Alignment

The moves also align with Aave’s product roadmap:

• GHO is a strategic focus, with a market cap around $312 million and plans for cross‑chain and institutional use.
• Aave had already trimmed exposure to MakerDAO’s DAI (now USDS) by lowering its LTV, pointing to evolving backing (including exposure to Ethena’s USDe) and a changing risk profile.

By limiting USDS to borrow‑only status:

• Aave reduces systemic exposure to a competing stablecoin system with different governance and incentives.
• Governance and risk resources can shift toward GHO, RWAs, and blue‑chip collateral.

There is a competitive angle, but also a governance one: Aave can align incentives and transparency far more tightly around its own stablecoin than around one controlled by another DAO.

5. Competitive And Strategic Landscape

5.1 How Aave Compares To Other Lending Protocols

Aave’s turn toward profitability and risk‑adjusted efficiency sits between two broad models:

• Compound has historically kept a narrow asset set and a limited multichain footprint, centered on Ethereum and blue‑chip assets, with slower growth but lower surface area.
• MakerDAO / Sky has evolved into a complex system with RWAs, USDe exposure, and internal credit structures like Spark and Grove-boosting flexibility but also structural and governance risk.
• Smaller money markets on newer L2s often chase TVL with aggressive incentives and long‑tail listings, taking on higher smart contract and market risk.

Aave is pushing a hybrid approach:

• Ambitious on scale and products (GHO, v4, RWAs, selective multichain).
• Increasingly strict on economics and risk (revenue thresholds, collateral pruning, consolidation).

5.2 Trade‑Offs: Growth vs Efficiency

The new stance comes with clear pros and cons.

Pros

• Deeper liquidity and better efficiency on core chains.
• Lower security, maintenance, and governance overhead.
• A clearer, more conservative risk posture appealing to both retail and institutions.
• Stronger alignment between revenue and governance choices.

Cons

• Less presence on emerging chains, leaving room for competitors.
• Tension with protocols like Sky, which may see collateral decisions as political.
• Reduced optionality if an “underperforming” chain later becomes important.

With 60–62% market share and deep integration across DeFi, Aave appears confident it doesn’t need to be everywhere to remain dominant.

5.3 Comparative Overview

Aave’s direction sits between “growth‑maximalist” and “efficiency‑maximalist” archetypes:

Aave is shifting toward the efficiency‑maximalist side of the spectrum without retreating into niche conservatism.

6. Risks And Negative Scenarios

The recent governance moves reduce specific risks but highlight others.

6.1 Governance And Political Risk

Collateral removals and chain exits can strain inter‑DAO relations:

• Sky’s community may view the USDS decision as a public setback, regardless of Aave’s framing.
• zkSync, Metis, and Soneium ecosystems may feel abandoned, complicating a future return.
• Delegates and risk providers risk lobbying from protocols whose assets are pruned.

If Aave is seen as using listings as competitive weapons rather than risk tools, trust in its neutrality could suffer. The 99.5% approval for USDS removal suggests internal consensus, but perceptions outside the DAO may differ.

6.2 Missed Optionality And Innovation

Tighter revenue thresholds and chain pruning could mean:

• Missing early exposure to chains that later become major hubs.
• Losing out on new use cases and integrations that first appear on smaller networks.
• Letting smaller rivals entrench on emerging L2s.

This is the familiar optionality vs focus trade‑off. Aave is betting on brand strength and network effects over blanket presence.

6.3 Concentration Risk

Consolidation amplifies concentration risk:

• Ethereum already generates over 80% of revenue.
• A major technical, regulatory, or market shock on Ethereum would hit Aave disproportionately.
• A narrow dependence on a few stablecoins and blue‑chip assets magnifies any systemic shock to those assets.

Some of this reflects market reality-Ethereum and a few L2s dominate DeFi-but it still requires careful risk management and contingency planning.

6.4 User Experience And Migration

Sunsets and collateral changes can stress users:

• zkSync, Metis, and Soneium users must unwind or migrate positions.
• USDS collateral users face strategy shifts, potential costs, and forced deleveraging.
• Poor communication or rushed timelines could erode trust.

Aave’s process-ARFCs, clear timelines, technical support-helps, but execution risk remains.

7. Scenario Analysis: Bull, Base, And Bear Paths

Explicit price targets are not the point here, but Aave’s refocus lends itself to three broad paths.

7.1 Bull Case: Efficient Dominance

In a bullish outcome:

• Consolidation on core chains deepens liquidity and improves pricing, attracting more users and volume.
• Pruning low‑revenue assets and chains boosts profitability and trims tail risk.
• GHO scales into a major DeFi stablecoin, supported by Aave liquidity and institutional integrations.
• Horizon and other RWA products pull in significant institutional capital, diversifying revenue.
• Governance maintains clear, data‑driven thresholds and avoids major misallocations.

Aave becomes the institutional‑grade money market of DeFi-large, profitable, conservative on risk, and deeply integrated.

7.2 Base Case: Steady Optimization

In a more neutral path:

• The USDS and shutdown decisions clean up the long tail but don’t dramatically change the trajectory.
• TVL and revenue grow roughly in line with DeFi overall.
• GHO gains share but remains one stablecoin among several.
• Aave launches on a small number of new chains that clearly meet the $2 million revenue bar.
• Inter‑protocol tensions flare occasionally but remain manageable.

Aave stays the leading lending protocol, gradually tightening its portfolio and risk posture.

7.3 Bear Case: Over‑Concentration And Lost Ground

In a bearish scenario:

• Concentration on a few chains and assets backfires as a major Ethereum or stablecoin event hits Aave hard.
• A perception that Aave uses listings as competitive levers sparks political backlash from other DAOs.
• Nimble rivals dominate new chains and novel use cases, slowly eroding Aave’s share.
• GHO fails to break out, leaving Aave dependent on external stablecoins it cannot fully control.
• Governance fractures into factions with competing visions on risk and expansion.

Here, the shift toward efficiency is overshadowed by external shocks and strategic missteps, leading to stagnation or relative decline.

8. Scenario Comparison

Conclusion: A Maturing Protocol In A Maturing Sector

Removing USDS as collateral and shutting down low‑TVL v3 deployments on zkSync, Metis, and Soneium marks a real inflection point for Aave.

A few themes stand out:

• Profitability and efficiency rival TVL as priorities. Assets and chains now need to justify their place economically and on a risk‑adjusted basis.
• Governance is more assertive and data‑driven. Delegates and token holders are willing to back decisions that are unpopular with counterparties when the numbers don’t add up.
• DeFi itself is professionalizing. Institutional capital, RWA markets, and native stablecoins like GHO demand a more disciplined approach than the earlier “deploy everywhere, list everything” phase.

The strategy is not without risk. Concentration, lost optionality, and inter‑protocol politics all loom as potential downsides. If handled well, however, Aave’s turn toward sustainability and risk‑aware growth could become a blueprint for how large DeFi protocols evolve: competing less on raw TVL, and more on efficiency, resilience, and governance quality.