In this piece I will share my thoughts on the recent ARC posted on the Aave governance forum that touches on some important upgrades to the Safety Module.
Introduction to the Safety Module
But first, a short introduction to the Aave Safety Module, from the Aavenomics paper: “The primary mechanism for securing the Aave Protocol is the incentivization of AAVE holders to lock tokens into a Smart Contract-based component called the Safety Module (SM). The locked AAVE will be used as a mitigation tool in case of a Shortfall Event within the money markets that belong to the Aave ecosystem. A Shortfall Event occurs when there is a deficit. The interpretation for the occurrence of a Shortfall Event is subject to the Protocol Governance vote, detailed in Governance.”
This ARC proposes two main changes to the current Safety Module (limited) functionality:
1. It introduces slashing for SM stakers. Up until now, stakers in the SM have faced no slashing risk, meaning that if a shortfall event were to happen to the Aave platform, they would face no penalty. If this ARC were to pass, going forward SM stakers would act as a backstop in case of a shortfall event; a share of their assets (up to a maximum to be discussed and decided by the community) would be slashed to cover for the damages caused by the event.
2. It introduces a new staked asset to the SM. So far, sta