DeFi Protocol Fires Starting Gun! Aave Community Proposal Suggests Freezing BUSD Reserves

After the issuance of BUSD was prohibited by the New York Department of Financial Services (NYDFS), the future of BUSD is uncertain. Leading lending protocol Aave took the first step towards BUSD in yesterday's governance proposal.

Aave Proposes Freezing BUSD Reserve

According to the content of the Aave governance proposal, as Paxos is no longer able to mint BUSD and can only redeem its underlying value by destroying BUSD, the proposer believes that the circulating supply of BUSD will gradually decrease over time. Therefore, the proposal suggests freezing the BUSD reserve on the Aave v2 Ethereum market.

Furthermore, the inability to mint new BUSD may harm arbitrage opportunities and asset pegging. The proposer suggests that after freezing the BUSD reserve, users should exchange their BUSD for other stablecoins.

However, although Aave users can currently provide liquidity with BUSD to earn interest, BUSD cannot be borrowed as collateral on Aave v2, so there is no direct risk to Aave.