The discussion was initiated by PaulPrec who proposed the concept of using AAVE tokens to create aAAVE, which could earn interest through a staking contract, effectively nullifying borrowing costs¹. However, Zer0dot highlighted the different risk profile associated with staking AAVE, particularly with the upcoming introduction of the "slashing" mechanism in the Aave Safety Module (SM). This mechanism could potentially lead to up to 30% of the staked AAVE being sold on the open market in a shortfall event².

Stani concurred with the idea of using StkAAVE as collateral, but emphasized the need for it to be in a separate money market within the Aave Protocol due to the circular risk. He also stressed that the Safety Module should not cover this money market as it would undermine its purpose³. Chevis added that earning interest on an asset that cannot be loaned out presents potential risks⁴.

Dydymoon proposed a solution to the risk issue, suggesting that if StkAAVE is used as collateral, it should be for something like 15-30% LTV. He reasoned that this would maintain a good Health Factor (HF) as the collateral is growing over time⁵. The discussion concluded with a general consensus on the need for a more conservative approach when dealing with StkAAVE as collateral, taking into account the potential risks associated with the "slashing" mechanism.