The discussion revolved around the Aave Safety Module (SM), its current state, and potential improvements. The SM, as analyzed by Llamaxyz, allows depositors to stake AAVE and ABPT tokens in return for stkAAVE and stkBPT, along with yield in AAVE¹. However, the SM is heavily dependent on the price of the AAVE token and is overexposed to this single asset. The value of Protocol Coverage is volatile, and the SM provides shortfall coverage, defined as 30% of the funds deposited. This is not scalable, and greater capital efficiency is needed¹.

Several improvements were proposed by Llamaxyz, including introducing additional or alternative assets into the SM, increasing the amount auctioned off in a shortfall event, and extending the Cool Down period to align with the governance process duration¹. Rcarey agreed with these points, emphasizing the need for greater capital efficiency and the risks of overexposure to AAVE². Jbeezy from Lido DAO suggested making the SM more productive and reducing direct risk exposure to AAVE⁴. John_TV_Locke expressed concern about the sustainability of the strategy and suggested that stablecoins and ETH should be prioritized in any insurance fund research/allocation⁵.

Dydymoon outlined a strategy to improve the SM mechanisms and efficiency, as well as GHO & AAVE liquidity⁶. They proposed a model for defining emissions per second with static percentages for different tranches, suggesting that part of the current AAVE reward budget should be used for vote incentives⁶. Bgdlabs recommended focusing on platforms that allow tokenization for re-usage of capital on the SM⁶. John_TV_Locke raised concerns about the sustainability of the strategy, noting that emissions to incentivize staking in the Safety Module are currently 4.8x revenue earned from the covered instances⁷. He also suggested characterizing the proposed changes into two groups: adding ETH and wstETH to the existing SM⁷.

Dydymoon proposed a reduction in AAVE dependency by increasing the assets receiving rewards (ETH & Stables) and creating a stable category with the highest slashing and yield⁸. Llamaxyz announced that Llama will publish the full proposal, split into six parts to facilitate discussions⁹. Seawolf supported many points made in the initial post, especially the need for an explicit Bad Debt budget and the point that the SM is overexposed to AAVE¹⁰.

In conclusion, the community is actively discussing ways to improve the Aave Safety Module, with a focus on reducing overexposure to AAVE, increasing capital efficiency, and diversifying the assets supported in the SM. The full proposal from Llama is expected to provide a comprehensive roadmap for these improvements⁹.