On September 24th, Aave Labs submitted a proposal to the Governance Forum, Aave Institutional ARFC, with the aim of establishing two funding pathways for over-collateralized mortgage loans targeting institutions: one is to create a new GHO facilitator with an initial quota of 25 million GHO; the other is to allow the use of assets from the DAO balance sheet as collateral to borrow up to 25 million US dollars USDC or USDT under Aave V3. These two pathways operate in parallel with separate quotas. However, the proposal is still in the community discussion phase and has not yet been approved by the formal Snapshot and AIP.

The business concept is to provide dollar-pegged stablecoin loans to institutional borrowers, who in return deposit BTC or ETH with qualified custodians as collateral. The typical loan-to-value ratio offered by Aave Labs ranges from 60% to 75%, with expected borrowing rates of 6% to 8% and a funding cost of about 4.5%. The net interest margin of 1.5% to 3.5% goes to DAO. The team indicates that there is an existing demand for loans amounting to approximately $300 million, with the first facility planned to be a $20 million BTC secured loan. The indicated demand is not a signed loan commitment, nor does it equate to income that has already been realized.

Both funding routes connect on-chain liquidity with off-chain legal contracts.

GHO Route requires a dedicated facilitator, with the quota managed by GHO Stewards. Loans are mainly issued in the form of USDC or USDT; therefore, newly minted GHO must be exchanged into the loan currency based on market capacity. For the balance sheet route, DAO is allowed to use WETH, WBTC, and a restricted portion of AAVE as on-chain collateral to borrow stablecoins for loans. The proportion of collateral used by AAVE in this route is planned to be limited to within 50%.

Each loan will establish a legal relationship through the main loan agreement, and the borrower, lending entity, and custodian will sign an account control agreement. The collateral remains with a qualified custodian, who monitors its value, issues notices for additional margin requirements, and sells assets through a regulated trading platform to repay the debt in case of default. Compared to pure on-chain settlement, this mechanism relies on the enforceability of contracts, custodial operations, and the responsiveness of the trading platform.

The proposal establishes multi-party control. Each fund authorization requires the approval of GHO Stewards. The current structure consists of a two-out-of-three multi-signature process involving Aave Labs, TokenLogic, and LlamaRisk; the conversion between GHO and the loan currency is carried out jointly by Aave Labs and TokenLogic; expanding the range of collateral still requires a decision from DAO. Governance can reduce the quota of facilitator to zero or remove it, but existing loans must still be handled in accordance with the contract.

The second route also creates on-chain leverage: DAO uses its own assets as collateral to borrow stablecoins, and then lends the funds to institutions. If the prices of BTC, ETH, or AAVE fall, the on-chain positions of DAO may be close to liquidation, and at the same time, the collateral of off-chain borrowers may also come under pressure. The price correlation between the two ends means that "over-collateralization" cannot simply be equated with low risk.

Expected interest rate spreads to be considerable, but GHO anchoring, maturity mismatch, and custody execution are three major hurdles to overcome.

Aave Labs considers a net interest margin of 1.5% to 3.5% as a new source of external income. This range is based on estimated borrowing pricing and a cost of funds of around 4.5%. Actual profits will be affected by utilization rates, exchange slippage, default losses, legal and operational expenses. As long as the loans have not been disbursed and the interest rates are not locked in, this range remains a forward-looking estimate.

The first risk is the anchoring effect of GHO. If a large amount of newly minted GHO is exchanged for USDC or USDT, short-term selling pressure may affect prices. The proposal suggests that on September 24th, approximately $59.9 million worth of GHO Stability Module in inventory can be redeemed, and it recommends that the conversion be carried out in conjunction with real-time inventory levels. When repaying loans, GHO is bought back, which theoretically could offset some of the negative impact over a complete cycle. However, time differences and market fluctuations may still result in costs.

The second risk is related to duration and liquidity. Institutional loan terms can range from 30 days to 12 months, while the cost of funds on-chain for DAO varies with market conditions. When borrowing interest rates are fixed or adjusted slowly, and the cost of funds on-chain suddenly increases, the interest margin may narrow. If DAO needs to quickly regain liquidity, off-chain loans cannot be withdrawn as promptly as positions in the liquidity pool.

The third risk is custody and legal enforcement. Since the collateral is not part of the public contract, external users cannot verify the entire status in real-time solely based on on-chain data; they rely on custody reports, contracts, and disclosures from the operators. In the event of a breach of contract, the speed of liquidation depends on the custodian and the exchange, rather than the automated smart contract. Bankruptcy, asset freezes, and disputes across judicial jurisdictions may delay the recovery process.

Governance processes remain a key constraint. ARFC first collects opinions; only with sufficient emotional support does it proceed to Snapshot. Subsequently, formal AIP authorizes facilitator and the operations related to the balance sheet. The community has the power to modify limits, collateral requirements, or reporting specifications, and may also veto proposals. Reporting a forum suggestion as " Aave has launched a $50 million institutional loan" would ignore the decisions that DAO has yet to make.

For Aave, this proposal tests whether the protocol can bring the advantages of on-chain funds into traditional institutional credit, while preventing off-chain opacity from harming DAO. The potential benefits come from real borrowing demands, while the potential risks span four layers: market, smart contracts, custody, and law. The next thing worth observing is not the scale of demand as advertised, but rather what kind of independent risk control, transaction-by-transaction disclosure, loss assumption, and exit mechanisms the community requires.