What is Umbrella System in AAVE?

2025-06-03

Aave, one of the leading decentralized finance (DeFi) lending protocols, is undergoing a significant tokenomics overhaul called “Aavenomics.”

Central to this upgrade is a novel concept known as the Umbrella system—a revamped safety module designed to protect the protocol and its users from extreme market events like bank runs.

In this article, we will explore the details of the Umbrella system, its role within Aave’s evolving ecosystem, and how it ties into other proposed features such as revenue redistribution, token buybacks, and the newly proposed Aave Finance Committee (AFC).

Key Takeaways

The Umbrella system is a new safety module proposed for Aave to protect against bad debt and bank runs.
It creates a liquidity commitment locked until a cooldown maturity to reduce the impact of sudden mass withdrawals.
Aave’s tokenomics revamp includes a buyback program of AAVE tokens, aiming to redistribute value to stakeholders.
The Anti-GHO token, a non-transferable ERC-20, is introduced for AAVE and StkBPT stakers as part of the revenue model.
The Aave Finance Committee (AFC) will oversee buybacks and redistribution using treasury funds responsibly.
Aave currently leads DeFi lending with $17.5 billion in total value locked (TVL) and continues to grow its revenue.

Register now on Bitrue — a trusted crypto exchange used by millions worldwide. Bitrue gives you access to hundreds of tokens, low-fee trading pairs, and high-yield staking opportunities. Whether you're buying Bitcoin, trading altcoins, or exploring new DeFi projects, Bitrue makes it easy to get started. Sign up today and start your crypto journey in minutes.

What Is the Umbrella System in Aave?

The Umbrella system is an upgraded version of Aave’s existing safety module, designed to serve as a financial shield against extreme liquidity events such as bank runs or mass withdrawals.

According to Marc Zeller, founder of the Aave Chan Initiative (ACI), the Umbrella system can protect users from bad debt exposure "up to billions" of dollars.

This mechanism works by requiring a liquidity commitment that remains locked in the protocol until a specified cooldown maturity period expires.

By doing so, the system makes sudden mass withdrawals less damaging, providing the protocol with breathing room to manage liquidity stress and bad debt scenarios.

The Umbrella system aims to enhance the protocol’s resilience and stability, which in turn helps maintain user confidence and allows for the development of new revenue-generating products.

How Does the Umbrella System Fit into Aave’s Tokenomics Revamp?

The Umbrella system is part of a broader Aavenomics proposal unveiled by Marc Zeller on March 4, 2025, aiming to reshape how Aave distributes revenue and manages risk. Other notable features of this proposal include:

1. Revenue Redistribution with Anti-GHO Token

The proposal retains the existing “Merit” program for GHO stakers and introduces the Anti-GHO token, a new non-transferable ERC-20 token. This token will be generated by AAVE and StkBPT stakers as part of the revamped rewards system.

The Aave DAO’s growing cash reserves, which have increased by 115% since August 2024, are expected to support this expanded reward structure.

2. Aave Finance Committee (AFC)

The AFC is a newly proposed governance body responsible for executing buyback programs and managing treasury funds prudently. This committee will have the authority to conduct AAVE token buybacks at a rate of $1 million per week during the first six months of the mandate.

These buybacks will be coordinated with market makers and aim to replenish the ecosystem reserve, ultimately supporting token price stability and stakeholder value.

3. Token Buyback and Redistribution Program

A key element of the proposal is a buyback plan where AAVE tokens will be repurchased from secondary markets and redistributed to the ecosystem.

TokenLogic, a financial services provider working with the Aave DAO, will size these buybacks according to the protocol’s overall budget, with an ambitious goal to at least match, if not exceed, protocol spending on AAVE tokens.

Read More: How to Buy Aave (AAVE)

Why Does Aave Need the Umbrella System?

DeFi lending protocols, by their peer-to-peer nature, are vulnerable to sudden liquidity shocks, often caused by mass withdrawals in times of market stress.

Such events—commonly called bank runs—can result in bad debt and threaten the solvency of the protocol.

The Umbrella system is designed to mitigate these risks by:

Locking liquidity to reduce panic withdrawals
Absorbing shocks from bad debt to protect depositors
Giving the protocol time to adjust and deploy resources effectively during crises

By strengthening the safety net, Aave aims to sustain its leading position in DeFi lending while improving user trust and encouraging more participation.

Aave’s Position in the DeFi Ecosystem

As of early 2025, Aave ranks number one in DeFi lending with $17.5 billion in total value locked (TVL), far surpassing competitors like JustLend, which holds $3.5 billion.

The protocol has experienced a surge in net deposits, hitting $33.4 billion in January 2025, surpassing its 2021 peak.

Aave operates across 14 different blockchains, generating revenue from interest fees and liquidations. Its recent growth and high fee collection ($8.3 million in just seven days) highlight its strong market position and the need for robust safety and tokenomics mechanisms like the Umbrella system and buyback programs.

Conclusion

The Umbrella system is a critical innovation in Aave’s evolving strategy to safeguard its ecosystem against severe liquidity crises.

Combined with the introduction of the Anti-GHO token, a structured revenue redistribution model, and the creation of the Aave Finance Committee, this proposal represents a comprehensive approach to improving protocol stability, user protection, and stakeholder value.

If approved by the community, these changes could set a new standard for DeFi protocol risk management, further cementing Aave’s leadership in the decentralized lending space.

Frequently Asked Questions (FAQs)

Q1: What is the Umbrella system in Aave?

The Umbrella system is a revamped safety module designed to protect Aave users from bank runs and bad debt by locking liquidity for a cooldown period to reduce sudden withdrawals.

Q2: What is the Anti-GHO token?

Anti-GHO is a non-transferrable ERC-20 token generated by AAVE and StkBPT stakers as part of the new revenue redistribution model.

Q3: What role does the Aave Finance Committee (AFC) play?

The AFC oversees token buybacks and distribution, managing treasury funds conservatively to support the protocol’s financial health.

Q4: How much TVL does Aave currently have?

Aave leads DeFi lending protocols with $17.5 billion in total value locked across 14 blockchains.

Q5: How does the Umbrella system prevent bank runs?

By committing liquidity that remains locked until cooldown maturity, it prevents sudden mass withdrawals and helps the protocol manage liquidity stress.

aave

Disclaimer: The content of this article does not constitute financial or investment advice.

Join Bitrue for exclusive rewards