A proposal from TokenLogic would establish a bad-debt backstop for Aave V4 lenders supplying wrapped Ether (WETH), USDC, or USDT to the Core liquidity Hub on Ethereum. Under the framework called Umbrella, the Aave DAO would absorb losses first, followed by volunteer underwriters, with coverage limited initially to these three lending markets.
The proposed underwriting targets are 800 ETH for Core WETH, 400,000 USDC for Core USDC, and 400,000 USDT for Core USDT. TokenLogic sized these targets based on expected loan growth over six to eight weeks.
How Losses Would Be Absorbed
Bad debt occurs when liquidation exhausts a borrower's collateral but leaves debt unpaid. Under the proposal, the DAO would absorb an initial layer through deficit offsets of 33 ETH for Core WETH, 15,000 USDC for Core USDC, and 15,000 USDT for Core USDT.
Umbrella underwriters could lose their committed capital to cover deficits beyond that layer. Their funds would continue earning supply yield until used, with coverage implemented by burning supplied Hub shares. Participants would receive additional rewards for accepting the loss risk.
Underwriter Restrictions
Underwriters would face a 20-day cooldown followed by a two-day withdrawal window when exiting. Assets would remain exposed to slashing during the cooldown period while continuing to earn rewards. Missing the withdrawal window would require activating another 20-day cooldown before attempting to withdraw again.
Coverage Scope and Exclusions
Coverage follows each specific reserve, meaning USDC deposits in other Hubs would remain outside the plan even though the token is identical. Capital allocated to one Hub asset cannot cover another reserve's deficit.
TokenLogic did not recommend initial coverage for USDG or frxUSD, citing uncertainty over incentive-sensitive lending activity and the ability to attract underwriters for those markets. Other Hub reserves were also excluded initially for reasons including limited incremental protection and narrow supplier bases.
TokenLogic proposed monitoring conditions after activation and reassessing the framework after three months, with excluded markets reconsidered as lending activity matures and supplier bases diversify.
