Summary
LlamaRisk supports the proposed steps and parameter adjustments to further depreciate Aave V2 markets. Given that V2 assets are frozen, preventing users from supplying or borrowing, and allowing only withdrawals and debt repayments, no new risk can be introduced as the market size remains the same.
As a result, the primary objective remains to manage and gradually unwind existing user positions in a controlled manner. The proposed approach seeks to reduce the likelihood of avoidable liquidations, which could otherwise result in bad debt for the protocol, particularly due to the illiquidity of certain assets.
Oracle Adjustment
Stablecoins
On V2 Ethereum, RAI cannot be used as collateral, while FEI’s collateral utility is effectively disabled due to its extremely low LT of 0.05%, making both assets functionally borrow-only. By hardcoding their oracle prices, the protocol introduces predictable behavior in response to price fluctuations, as seen in the chart below. As of March 31, 2026, the total sell-side secondary market liquidity against RAI and FEI on Ethereum is $191K and $59K, respectively.
In the event of a price decline, borrowers of these assets would face minor inconvenience, as their debt valuation would remain unchanged rather than declining, potentially encouraging them to unwind their positions. Conversely, if prices increase, the fixed oracle prevents debt inflation, thereby reducing the risk of liquidations that would otherwise result from rising debt valuations. This approach helps avoid unnecessary liquidations in both scenarios.
RAI is not pegged to the US dollar; instead, it aims to maintain a relatively stable value that fluctuates based on market supply and demand. Recent data shows RAI trading at approximately $3.15, below the proposed fixed oracle price of $4. As a result, transitioning to a fixed oracle would effectively overvalue RAI debt, thereby reducing users’ health factors. The total borrowed RAI amount is ~$72K, almost entirely from a single address supplying USDC as collateral. This position currently has a health factor of 2.10, which is expected to decrease to around 1.65 following the shift to a fixed oracle price. Despite this reduction, the position remains well above liquidation thresholds and is unlikely to face liquidation risk, even in the long term, due to the fixed RAI price. However, given RAI’s non-pegged nature, we recommend monitoring its market price to ensure Aave doesn’t underprice it in the future, particularly as it traded consistently above $4 in late 2025, as illustrated below.
Source: LlamaRisk, March 30, 2026
Volatile Assets
For illiquid and volatile assets on Aave V2 whose collateral utility has been restricted or fully disabled, price oracles are being adjusted to fixed asset/ETH values set at a 30% premium to their current spot prices. Historical data indicate that, on a cumulative basis over 1 year, these assets have generally underperformed ETH.
While CVX briefly deviated from this trend, exhibiting a cumulative return above 0.3 relative to ETH for approximately 38 days (9.57% of the observed period), this outperformance was not sustained. Across all assets analyzed, both the mean and median daily returns relative to ETH remain negative. This suggests that, based on historical behavior, these assets are more likely to trade below their fixed oracle prices over time.
As a result, debt denominated in these assets will be consistently overvalued within the protocol, gradually weakening users’ health factors and potentially leading to liquidations in some cases. However, this intentional overpricing creates a protective buffer for liquidators, enabling them to acquire these illiquid assets more effectively and execute timely liquidations. This mechanism helps mitigate the risk of bad debt accumulation within the protocol.
Source: LlamaRisk, March 30, 2026
Risk Parameters & IRM Adjustment
For assets with a non-zero liquidation threshold (LT > 0.05%), reducing LT by 4% lowers users’ health factors, thereby moving positions closer to liquidation. This adjustment results in approximately $319K of newly liquidatable collateral, representing about 0.18% of the total Aave V2 market size, small enough to allow for orderly and smooth unwinding. However, beyond 4% LT reduction, simulations show a nonlinear jump, likely from positions clustered near the threshold. Additionally, increasing the liquidation bonus (LB) to 10% across all assets strengthens incentives for liquidators, increases the likelihood that these positions are liquidated efficiently, and reduces the risk of bad debt accumulation within the protocol.
Reducing Slope2 to 100% for illiquid and stressed reserves helps mitigate bad-debt risk by slowing the growth of the debt component, thereby avoiding liquidations driven by increasing borrow rates. While this adjustment may lower supply APRs for affected assets, potentially reducing their attractiveness and introducing marginal liquidity risk in stressed assets if suppliers withdraw, the overall impact is expected to be negligible given the high Reserve Factor (99.99%). Supply APRs are already minimal (<0.01%), and the total size of stressed positions remains below $1M, further limiting the significance of this effect.
The proposed IRM changes to WPOL on Polygon would raise the borrow APR from 8.6% to 20%, potentially prompting users to unwind their WPOL debt positions, currently totaling $14.92K.
Disclaimer
This review was independently prepared by LlamaRisk, a DeFi risk service provider funded in part by the Aave DAO. LlamaRisk is not directly affiliated with the protocol(s) reviewed in this assessment and did not receive any compensation from the protocol(s) or their affiliated entities for this work.
The information provided should not be construed as legal, financial, tax, or professional advice.