Aave proposal could reduce some lenders interest returns by up to 60 percent

A recent proposal put forward by TokenLogic could significantly alter how borrower interest is distributed across the Aave lending protocol. Under the plan published on November 12, lenders supplying DAI on Polygon might see their share of borrower interest drop from 75 percent down to 30 percent. The initiative seeks to redirect a larger portion of incoming interest directly into Aave’s DAO treasury rather than to liquidity suppliers.

The sweeping adjustments cover 54 distinct reserves spread across 12 Aave V3 instances alongside Ethereum V2. According to TokenLogic projections using balances and rates from November 9, the changes could generate approximately $4 million in additional annualized revenue for the DAO. This figure includes about $1 million originating from Plasma USDT0, although that specific segment will only join the formal proposal once its underlying terms are completely finalized.

At the core of the mechanics is the reserve factor, which determines the exact share of borrower interest allocated to the DAO rather than individual suppliers. Adjusting this metric alters interest distribution without directly modifying the overall borrowing-rate curve. TokenLogic contends that capturing a larger share is necessary to properly compensate the DAO for the inherent risks associated with supporting various borrowable reserves.

TokenLogic proposal shifts Aave borrower interest toward the DAO treasury, lowering returns for select lenders.

Different pools face varied impacts depending on the specific asset and market conditions. For instance, the Polygon V3 DAI reserve factor is slated to increase from 25 percent to 70 percent, reducing the modeled supply annual percentage yield by 270 basis points while generating nearly $95,000 in extra annual DAO revenue. Other assets experience different adjustments, such as Avalanche DAI.e seeing a 173-basis-point model cut, whereas certain collateral reserves with near-zero lending yields face negligible practical yield changes despite 100 percent reserve factors.

For Ethereum V2, TokenLogic suggests raising five remaining borrowed reserves to a 99.99 percent reserve factor. The resulting drop in returns is intended to encourage suppliers to exit these declining legacy markets, which could subsequently increase utilization rates and push borrowing costs higher.

Why it matters

These proposed modifications directly impact savers and liquidity providers by altering the returns generated from keeping funds in specific Aave reserves. By intentionally lowering yields on older or legacy pools, the protocol aims to encourage capital to shift away from declining markets while reinforcing the DAO treasury.

Moving forward, the publication awaits community feedback before advancing toward the formal Aave Improvement Proposal stage, meaning all current revenue projections and yield reductions remain estimated models.