June 5, 2025 – Aave, the decentralized liquidity protocol, has launched Umbrella, a fully onchain system for automatically covering bad debt and managing protocol risk. Built by BGD Labs and approved by Aave governance, Umbrella introduces a more capital-efficient and automated way to protect the protocol without requiring governance intervention.
By letting users stake their aTokens, interest-bearing tokens like aUSDC and GHO, Umbrella uses protocol assets to actively manage risk before issues arise. Staking is non-custodial and governed by protocol-defined rules, meaning users maintain full control of their positions while rewards accrue automatically.
With this upgrade, users who stake their aTokens and continue earning yield on their supplied assets while gaining additional rewards (e.g., GHO, AAVE) for helping secure the protocol. In return, they accept the possibility of slashing if a deficit arises on the specific pool and asset they have staked.
“Umbrella is a major step toward fully autonomous, onchain risk management,” said Stani Kulechov, founder of Aave Labs. “It advances Aave’s mission to make DeFi safer, more resilient, and easier for anyone to use. It also showcases the power of staking to align users with protocol health in a transparent, non-custodial way.”
“Umbrella represents a paradigm shift in DeFi,” said Ernesto Boado, Co-Founder of BGD Labs. “For the first time, liquidity provision and protection in the Aave Protocol work fully onchain and in sync. This breakthrough gives users greater control over their assets and a more secure, transparent DeFi experience.”
Umbrella: Automating Bad Debt Coverage with aToken Staking
Umbrella enhances Aave’s safety net by replacing the existing Safety Module with a non-custodial automated staking system that utilizes aTokens. If a deficit occurs in a given asset, like USDC or GHO, Umbrella automatically burns the corresponding staked aTokens to offset the loss, removing the need for governance decisions or manual intervention. This creates a more efficient, responsive, and predictable safety mechanism for the protocol and its users.
A Three-Component Architecture for Scalable Risk Coverage
Umbrella is powered by a modular smart contract system designed for precision and flexibility:
StakeTokens: Users stake wrapped aTokens or GHO with a 20-day cooldown and 2-day withdrawal window.
Rewards Controller: Manages dynamic, multi-token rewards using a mathematically modeled Emission Curve to target optimal staking levels.
Umbrella Core: Monitors Aave V3 pool deficits and executes automated slashing events when necessary.
All components are governed and upgradeable by the Aave DAO. Staking risk is isolated to the specific asset and network where the aTokens are staked.
Key Benefits of Umbrella
Automated Coverage: Eliminates reliance on governance for bad debt resolution.
aToken Staking: Allows users to stake interest-bearing aTokens they already hold within Aave.
Increased Efficiency: aTokens are the most capital-efficient assets to cover deficit: burning for example aUSDT to cover USDT bad debt.
Enhanced Security: Responds directly to measurable, onchain deficit data.
Umbrella Staking: Empowering Suppliers to Participate in Risk Management
With the Umbrella system, users who aren’t borrowing can stake their aTokens to earn rewards while contributing to protocol safety. In doing so, they take on proportional slashing risk for the same asset they stake. For example, staking aUSDC helps cover bad debt in USDC. This design encourages broader participation in risk management and aligns incentives with protocol health.
Governance, UI, and Initial Activation
A dedicated Umbrella UI interface will be hosted on website and the aave.com app allows users to stake assets, manage cooldowns, claim rewards, and monitor protocol exposure. The interface is open-source, production-ready, and built for decentralized hosting and integrations.
Initial activation will start with Ethereum and expand to other networks, focusing on high-borrow demand assets like USDC, USDT, WETH, and GHO. Activation parameters, including reward rates and target liquidity levels, will be set by the Aave DAO, with ongoing management delegated to the Aave Finance Committee.
Transition from the Legacy Safety Module
Umbrella will gradually replace the legacy Safety Module:
stkAAVE and stkABPT will remain active during the transition, with slashing disabled once Umbrella reaches sufficient scale.
Staked GHO (stkGHO) is now being transitioned to savings GHO (sGHO) with new parameters that remove the cooldown period and slashing risk. This will let users earn yield on their GHO without the risk typically associated with Aave staked assets.
Security and Audit Commitments
The Umbrella implementation has undergone rigorous security testing to ensure its reliability and alignment with Aave’s high standards for protocol safety. Four independent audits were conducted by Certora, MixBytes, Ackee Blockchain, and @StErMi.
Built on the Foundation of Aave v3.3
Umbrella was made possible by the earlier deployment of Aave V3.3, also developed by BGD Labs, which introduced core risk infrastructure - including tracking and logging of unresolved debt, often left behind after liquidations. This enables Umbrella to detect and resolve deficits automatically, creating a more resilient protocol. Additionally, V3.3 optimized the liquidation algorithm to reduce leftover “dust” and minimize protocol liabilities over time.
