Aave has switched DAI’s loan-to-value to 0% on its v3 Arbitrum market, effectively stripping the stablecoin of collateral power and trapping some accounts in awkward positions. The change surfaced publicly after a user on r/defi reported on December 25 that DAI “just became unavailable as collateral” and that their dashboard now shows DAI as a 0% LTV asset.
The user wrote that their position did not liquidate but “is basically frozen” because Aave blocks many position changes until 0% LTV collateral is withdrawn. To stay solvent, they described withdrawing DAI in small chunks, swapping to USDC on Uniswap, and resupplying USDC to rebuild their health factor.
On markets, DAI held its peg. It traded around $0.9997 with negligible 24-hour movement. AAVE changed hands near $152, up roughly 3% on the day, and ARB traded near $0.19, suggesting traders viewed the parameter shift as housekeeping rather than protocol stress.
What actually changed on Aave Arbitrum
From a protocol perspective, Aave did not remove DAI from the market. Users can still supply and withdraw DAI on Arbitrum. The critical change sits in the risk configuration. Governance set the DAI loan-to-value ratio to 0%. That move stops new borrowing against DAI and strips existing DAI deposits of incremental borrowing power.
The user’s error message matches Aave’s own documentation for assets with zero LTV. The interface forces users to either withdraw those assets or disable them as collateral before they adjust other parts of the position. With DAI now at 0% LTV, borrowers who leaned heavily on DAI as their main stable collateral discover they must move that leg first, or they risk tripping liquidations while they rebalance.
The governance trail: this was not random
The Arbitrum switch tracks a broader governance pivot that started in 2024, when Aave delegates and risk teams began to question MakerDAO’s direction and the risk profile behind DAI. An April 2024 Aave risk proposal titled “Risk Parameters for DAI Update” outlined an aggressive path that would set DAI’s LTV to 0% across v3 markets as a hedge against Maker’s growing exposure to Ethena’s USDe and the evolving Sky ecosystem.
That proposal already named v3 Arbitrum as a candidate for a 0% LTV configuration. It framed a zero-LTV setting as a clean way to keep DAI borrowable while blocking DAI-backed leverage if Maker’s risk profile drifted too far for Aave’s comfort.
The final push came this autumn. On November 17, Aave delegate ACI published the governance thread “[ARFC] Remove USDS as collateral and increase RF across all Aave Instances”. The headline focused on USDS. The attached risk report from Chaos Labs extended the logic to DAI across the board.
“USDS and DAI show very limited usage as collateral across Aave markets… we recommend disabling their collateral functionality across all instances where they remain enabled.”
Chaos Labs quantified DAI’s impact. On Arbitrum, only about $203,117 of DAI actually backed borrows, roughly 3.01% of DAI supplied on that market, with an estimated $782 in annual revenue at a 5% borrow rate. Across Optimism, Polygon, Avalanche and Ethereum main markets, DAI collateral use also sat in low six figures with minimal fee contribution. The report called DAI a “legacy” asset on several chains with thinning liquidity and argued that its collateral status added tail risk without real income.
In its specification table, Chaos Labs recommended dropping the maximum LTV for DAI from 63% to 0% on every v3 instance where it still functioned as collateral, including Arbitrum. ACI later confirmed in the same thread that the associated Snapshot vote passed on December 3 with quorum and a strong “YAE” majority, clearing the way for an on-chain AIP to enforce the new parameters.
Regional media in early December, including PANews via MEXC and Odaily Planet Daily, reported that the Aave community had passed a proposal to set the LTV of USDS and DAI to 0% and to raise their risk reserve factor to 25% across all Aave v3 deployments. That coverage matched the parameter grid in the Aave governance thread and signalled that implementation would hit every live market once the AIP executed.
Why DAI lost its collateral role
This change does not reflect a DAI depeg event. It reflects a repricing of protocol-level risk and opportunity cost.
First, risk teams view Maker’s new Sky-branded architecture and its USDS sibling as materially more complex than the earlier, mostly overcollateralized DAI model. The same Chaos Labs analysis that targeted USDS highlighted a $12.1 billion Sky collateral portfolio spread across multiple “Star” agents and future “Institutional Primes”. The report argued that each new Star, and each new credit line, widens the attack surface Aave inherits when it accepts DAI and USDS as collateral.
Second, DAI no longer carries its old weight inside Aave. Borrowers increasingly lean on other stables and on newer structured tokens tied to basis trades. In that world, leaving DAI as a full-spectrum collateral asset gives users one more lever to stack leverage on top of a backing profile that Aave does not control, for very little protocol income.
Delegates appear to have concluded that this trade-off no longer made sense. The latest governance step aligns with the earlier 2024 roadmap to gradually reduce DAI’s LTV and then remove it as collateral entirely, but it arrives after months of public warning in risk forum posts rather than as a stealth switch.
How this hits Arbitrum users today
The Arbitrum user who flagged the change landed in a classic edge case. DAI made up more than half of their collateral basket. After the switch to 0% LTV, their health factor dropped because DAI no longer contributed borrowing power, yet they could not freely reshuffle their portfolio until they either withdrew DAI or toggled it off as collateral.
They solved it with slow withdrawals, swaps into USDC, and resupplies. That path works if markets stay calm and on-chain liquidity holds. It looks far less friendly in a stress day where every dollar of buffer matters and swap slippage jumps.
Other DAI-heavy accounts on Arbitrum v3 face the same constraint. The protocol does not force immediate unwinds and does not liquidate solely because an asset’s LTV drops to 0%. But it also no longer counts DAI toward future borrowing headroom. For high-leverage users, that turns DAI into dead weight unless they migrate into stables that Aave still treats as productive collateral.
Given the global scope of the governance decision, similar patterns likely apply on other Aave v3 deployments where DAI still sits in user portfolios, even if the Arbitrum market felt the pain first through a Reddit post rather than an official blog headline.
