Overview
The purpose of this analysis is to evaluate and propose the introduction of segregated bluechip E-Modes for WETH, cbBTC, and WBTC on Aave v3. These configurations are designed to allow users to opt into a borrowing environment where supplied collateral is not rehypothecated, thereby eliminating liquidity and liquidation execution risk arising from rehypothecation, removing borrower exposure to counterparty default risk, and enabling more competitive risk parameterization.
Historically, Aave has mostly relied on a pooled collateral model in which supplied assets are rehypothecated to support capital efficient lending markets. This design has formed the foundation of Aave’s growth and remains the dominant structure across onchain lending today. In parallel, relatively small but steadily growing segment of onchain lending has emerged around segregated collateral models, where supplied assets are escrowed and never lent out to other borrowers. This approach has been particularly favored for bluechip collateral assets, such as BTC wrappers, where borrowers tend to prioritize risk isolation, predictable liquidity, and the elimination of counterparty exposure over maximizing supply yield.
As onchain lending matures and borrower preferences diversify, supporting both pooled and segregated collateral experiences becomes increasingly important. Introducing segregated bluechip E-Modes allows Aave to participate in this growing segment, expand its addressable borrower base, and capture demand from users who prefer an escrowed collateral model, while preserving the existing pooled markets for users who continue to value capital efficiency.
Our recommendation is to support the introduction of segregated bluechip E-Modes for WETH, cbBTC, and WBTC on Core, Arbitrum and Base instances as a complementary option to existing pooled markets. This approach expands the protocol design space without disrupting current users, improves risk segmentation, and allows Aave to better serve heterogeneous borrower preferences.
Terminology
This section defines the core terminology used throughout the analysis to ensure a shared and consistent understanding of the concepts discussed. The distinction between segregated and pooled collateral models is central to this proposal, and clarifying these terms upfront is intended to avoid ambiguity and ensure that subsequent discussion, evaluation, and governance deliberation are grounded in a common conceptual framework.
Segregated (Non Rehypothecated) Collateral
Segregated collateral refers to a lending design in which supplied assets are escrowed and not lent out to other borrowers under any circumstances. Collateral supplied under this model remains fully segregated and continuously available, regardless of market utilization or borrowing activity elsewhere in the protocol.
From the borrower perspective, this structure ensures that collateral can always be withdrawn immediately upon loan repayment, without dependency on external liquidity conditions. From the protocol and liquidator perspective, escrowed collateral is always available to facilitate timely liquidations when positions approach or breach required collateralization thresholds. As a result, liquidity availability for withdrawals and liquidation execution is guaranteed by design.
The primary tradeoff of this model is reduced capital efficiency. Because escrowed collateral is not deployed elsewhere in the system, it does not generate yield for the supplier, and borrowing costs are not offset by supply side interest.
Pooled (Rehypothecated) Collateral
Pooled collateral refers to the traditional lending model used by Aave and most onchain money markets, where supplied assets are pooled and made available for borrowing by other users. In this structure, collateral backing a loan is not held idle but is instead lent out within the protocol to support additional borrowing activity.
This design enables higher capital efficiency by allowing supplied assets to generate yield, which in turn lowers net borrowing costs for users and supports deeper, more liquid markets across multiple asset pairs. Pooled collateral models are therefore well suited for users who value yield generation and capital efficiency.
However, because collateral is actively deployed, its availability is subject to overall market utilization. In periods of high utilization, collateral may not be immediately withdrawable, and liquidation execution relies on sufficient available liquidity within the pool. As a result, lenders and the protocol implicitly take on additional liquidity and counterparty exposure relative to segregated collateral models, all else being equal.
Motivation
The onchain lending market has reached a meaningful scale, with total active loans across chains and lending protocols amounting to approximately $36.7 billion. The majority of this activity continues to be concentrated in pooled lending markets. Approximately 81% of total active loans, or roughly $30 billion, are issued against rehypothecated collateral structures.
Within this segment, Aave represents the dominant share. Aave accounts for approximately 62% of total active onchain loans and roughly 76% of all loans issued against rehypothecated collateral. This highlights both Aave’s central role in the pooled lending ecosystem and its strong product market fit for capital efficient, rehypothecated lending models.
In contrast, lending activity backed by segregated, escrowed collateral remains smaller in absolute terms but is far from negligible. Active loans issued against segregated collateral currently total approximately $6.8 billion. While this represents a minority share of the overall lending market, it reflects a distinct and growing user preference for non rehypothecated collateral designs.
Growth trends over the past year further reinforce this observation. Active loans issued through pooled lending protocols increased by approximately 56%, while active loans issued through segregated lending protocols increased by approximately 90% over the same period. The higher percentage growth observed in segregated lending is partly attributable to its smaller starting base. In absolute terms, however, pooled lending protocols, driven primarily by Aave, accounted for the larger share of net growth in active loans.
Recent upgrades in Aave v3.6 introduce additional flexibility that enables clearer separation of collateral behaviors and more granular market configurations, making factual collateral segregation feasible where it was previously constrained. This expanded design space allows Aave to serve a broader range of borrower preferences without disrupting existing pooled markets.
Taken together, these trends indicate that segregated collateral lending is evolving from a niche design into a meaningful and expanding segment of onchain credit markets. While pooled rehypothecated lending remains dominant, demand for escrowed collateral structures is growing steadily. The primary motivation for this proposal is therefore to enable Aave to participate in this segment, capture emerging demand, and extend its market leadership to users who prefer segregated collateral experiences, while continuing to support and preserve its core pooled lending markets.
High Level Design and Implementation Approach
This section outlines a high level design for enabling segregated bluechip collateral borrowing on Aave v3 without modifying the core pooled markets. The intent is to describe the conceptual mechanism from a risk management perspective, while leaving smart contract implementation details, security considerations, and final architectural decisions to relevant contributors.
Conceptual Architecture
At a high level, the segregated collateral experience can be implemented by introducing wrapper assets for each targeted bluechip collateral. These wrapper assets are designed solely to represent escrowed collateral positions and to ensure that the underlying asset is not made available for borrowing.
Wrapper Contracts and Segregated Wrapper Assets
For each asset covered in this proposal, a dedicated wrapper contract would accept deposits of the underlying token and mint a corresponding segregated wrapper token (sToken) on a 1:1 basis.
Examples include the following mappings.
WETH to sWETH
cbBTC to scbBTC
WBTC to sWBTC
The wrapper naming and symbols are illustrative and can be finalized during implementation. The core requirement is that each wrapper token is always and immediately redeemable for its underlying at a 1:1 rate, similar to the WETH9 implementation and with minimal functionality.
Aave v3 Listings and Collateral Configuration
The segregated wrapper assets would then be listed on Aave v3 as collateral and configured as non-borrowable. This configuration ensures that the supplied collateral cannot be borrowed by other users, which is the central property required to prevent rehypothecation.
From the user perspective, supplying the segregated wrapper asset should function similarly to supplying any other collateral, with the distinction that the supplied balance is not part of the borrowable liquidity pool and is only usable as collateral within its designated E-Mode category.
E-Mode Configuration and Stablecoin Access
To preserve existing liquidity and user experience for stablecoin borrowing, the proposal relies on E-Mode categories that allow segregated wrapper collateral to access the existing core stablecoin markets.
Concretely, the design would introduce dedicated E-Mode categories that include the segregated wrapper collateral assets and the relevant stablecoin borrow assets already listed on the instance.
This approach allows segregated collateral users to borrow from the existing deep stablecoin reserves.
User Flow and Integration at a High Level
From a user flow perspective, the mechanism can be summarized as follows.
A user who opts into the segregated pathway deposits WETH, cbBTC, or WBTC. The corresponding wrapper contract receives the deposited asset and mints a segregated wrapper token (sToken) on a 1:1 basis. The minted sToken is then supplied to Aave on behalf of the user, where it functions exclusively as collateral in E-mode and cannot be borrowed by other participants.
When the user repays their debt and withdraws collateral, the flow reverses. The wrapper token is withdrawn from Aave, burned in exchange for the underlying, and the underlying token is returned to the user.
Pricing and Oracle Considerations
The segregated wrapper assets are intended to maintain strict 1:1 parity with their underlying tokens, as they are simple proxy contracts. As a result, the wrapper assets should be priced identically to their underlying assets. This can be achieved by reusing the existing oracle configuration for the underlying assets.
User Experience and Interface Considerations
The introduction of segregated bluechip collaterals is intended to have minimal impact on the existing Aave user experience and interface. The proposal is designed to extend current functionality rather than alter existing workflows, ensuring that users who prefer pooled markets can continue interacting with the protocol without disruption.
From a frontend perspective, the segregated wrapper assets (sTokens) would be listed alongside existing assets in the Aave interface, following the same conventions used for other listed tokens. Each wrapper asset would be clearly labeled to reflect its segregated nature, for example sWETH – Segregated Wrapped Ether, scbBTC – Segregated Coinbase Wrapped Bitcoin, and sWBTC – Segregated Wrapped Bitcoin. This naming convention is intended to provide immediate clarity to users regarding the collateral treatment of these assets.
User interaction flows would remain consistent with current behavior. Supplying segregated collateral, entering the relevant E-Mode, borrowing stablecoins, and managing positions would follow the same steps and interface patterns already familiar to Aave users. The primary difference is the explicit choice at deposit time between supplying the underlying asset into the pooled market or into its segregated counterpart.
Risk and Benefit Assessment
This section outlines the primary benefits and risks associated with the introduction of segregated bluechip E-Modes, with a focus on protocol level considerations, borrower outcomes, and potential second order effects.
Benefits
The proposal enables Aave v3 to directly participate in the growing segment of segregated collateral lending within the broader borrow lend ecosystem. While pooled lending remains dominant, segregated collateral borrowing is exhibiting sustained growth, and supporting this design allows Aave to capture incremental demand rather than ceding this segment to alternative protocols.
Certainty around liquidity availability materially improves the risk profile of segregated collateral positions. Because collateral is escrowed and never rehypothecated, the protocol can safely support higher borrowing power through better LTV and LT configurations, improving competitiveness for borrowers.
Guaranteed liquidity availability also ensures that liquidations are not halted or delayed during periods of market volatility due to elevated utilization. This removes a key execution risk present in pooled markets when market approaches full utilization levels and supports more predictable system behavior under stress.
Lastly, borrowers using segregated collateral also avoid counterparty exposure to other borrowers. Since collateral is not lent out, borrowers are insulated from risks associated with third party defaults or liquidity shortfalls elsewhere in the protocol, resulting in a clearer and more contained risk profile.
Risks
The primary risk associated with this proposal relates to potential liquidity migration from pooled markets to segregated markets, particularly for ETH collateral. ETH is a highly utilized market and serves as foundational liquidity supporting large LST and LRT borrowing activity. A meaningful migration of existing ETH supply from pooled markets into segregated configurations could reduce available liquidity for LST and LRT markets and negatively impact overall protocol revenue.
To mitigate this risk, segregated ETH E-Modes should be introduced with tighter initial supply caps relative to BTC based segregated configurations and monitored closely following deployment. This approach allows governance to observe whether segregated E-Modes are primarily attracting new borrowing demand or instead incentivizing migration of existing positions from pooled markets. Parameter adjustments and caps can then be iteratively refined based on observed usage patterns and their impact on broader market health.
Overall, while the introduction of segregated bluechip E-Modes introduces a tradeoff between borrowing power, capital efficiency and risk isolation, the proposed design, combined with conservative rollout parameters and active monitoring, allows Aave to explore this design space without materially compromising the stability or profitability of existing pooled markets.
LT Configuration Considerations for Segregated Markets
The recommended thresholds are outputs of Chaos Labs VaR-based simulation frameworks that evaluate downside price moves and liquidation feasibility under a range of market conditions, including stressed environments.
While the specific modeling assumptions and parameterization are subject to refinement and implementation level review, the key calibration intuition is straightforward. In segregated configurations, collateral is escrowed and not rehypothecated, which improves certainty around collateral availability during liquidation events. In addition, collateral is segregated from pooled liquidity dynamics and is not cross margined with broader pool utilization, reducing reliance on external liquidity conditions for liquidation execution. Together, these factors meaningfully reduce liquidation execution risk and limit second-order effects that can arise when collateral is deployed elsewhere in the system.
As a result, the protocol can support higher borrowing power for these assets relative to pooled configurations while maintaining conservative liquidation safety margins. The proposed LT values are therefore designed to reflect the improved predictability of liquidation execution and collateral accessibility in segregated markets, while still accounting for underlying price volatility, liquidity conditions of borrow assets, and the operational realities of liquidation execution.
Cross Margin Restrictions
In historical implementations of E-Modes, the protocol fully isolated parameterized debt assets via the E-Mode mask; however, users could hypothetically add non-whitelisted collateral assets to the aggregate position and borrow E-Mode-whitelisted borrowable assets. This led to aggregated position health being dictated by an effectively cross-margined collateral position, complicating the dynamics surrounding factual isolation.
With the launch of v3.6, there is now a practical path to pure isolation and to strictly preventing cross-margin within the proposed Segregated Bluechip Stablecoin E-Modes. Specifically, any collateral asset that is not part of a given E-Mode is configured with a maximum LTV of 0 when that E-Mode is active. This ensures that users who already maintain cross-margin positions, where stablecoins are borrowed against a combination of wrapped bluechip and non bluechip collateral, cannot activate the Segregated Bluechip Stablecoin E-Mode to improve their health factor, which is explicitly designed to operate without cross-margin exposure.
Operationally, this requires enumerating all collateral assets that are outside the scope of each Segregated Bluechip Stablecoin E-Mode and assigning them an LTV of 0 within that E-Mode. To avoid excessive table expansion and to maintain readability, these assets are grouped under an “Others (LTV0)” category in the specification tables, with the full list disclosed in the section below.
Assets Configured as “Others (LTV0)”
The following lists of collateral assets that are configured with LTV0 within each Segregated Bluechip Stablecoin E-Mode.
Segregated ETH Stablecoin E-Mode
Ethereum Core
WETH, WSTETH, WEETH, CBETH, RETH, WBTC, SDAI, PYUSD, TBTC, CBBTC, USDS, FBTC, EURC, DAI, LUSD, ETHx, AAVE, OSETH, USDE, SUSDE, RSETH, LBTC, FRAX, EBTC, LINK
Segregated BTC Stablecoin E-Mode
Ethereum Core
WETH, WSTETH, WEETH, CBETH, RETH, WBTC, SDAI, PYUSD, TBTC, CBBTC, USDS, FBTC, EURC, DAI, LUSD, ETHx, AAVE, OSETH, USDE, SUSDE, RSETH, LBTC, FRAX, EBTC, LINK
Arbitrum
WETH, WSTETH, WBTC, USDC.e, TBTC, DAI, WEETH, LINK, RETH, AAVE, ARB
Base
WETH, CBETH, WSTETH, USDBC, CBBTC, EURC, TBTC, WEETH, LBTC, AAVE
Recommendation
We recommend the introduction of segregated bluechip stablecoin E-Modes on Aave v3, supported by the listing of dedicated segregated wrapper assets and conservative initial configuration parameters.
Specifically, we recommend listing segregated wrapper assets (sTokens) for bluechip collateral and enabling their use exclusively within dedicated segregated stablecoin E-Modes. This includes the listing of sWETH, scbBTC, and sWBTC, with each asset configured as non borrowable and usable as collateral only within its designated E-Mode. These E-Modes should provide access to existing core stablecoin markets and be configured with higher borrowing power relative to pooled markets, reflecting the elimination of rehypothecation-related liquidity and execution risks.
With respect to instance level rollout, we recommend the following approach.
On the Core instance, we recommend introducing segregated ETH and BTC stablecoin E-Modes, supported by the listing of sWETH, scbBTC, and sWBTC. Given ETH’s central role in supporting LST and LRT borrowing activity on Core, the segregated ETH E-Mode should be introduced with conservative supply caps and closely monitored to assess whether it primarily attracts new borrowing demand or induces migration from existing pooled markets.
On Base, we recommend listing scbBTC and introducing an segregated BTC stablecoin E-Mode.
Similar to Base, on Arbitrum, we recommend listing sWBTC and introducing an segregated BTC stablecoin E-Mode.
The segregated ETH E-Mode is recommended only for the Core instance at this stage. Expansion of segregated ETH configurations to other instances should be considered only after sufficient observation confirms that the design attracts incremental demand without materially impacting existing market liquidity, utilization or protocol revenue.
Specification
Ethereum Core
| Parameters | Value | Value | Value |
|---|---|---|---|
| Asset | sWETH | scbBTC | sWBTC |
| Isolation mode | No | No | No |
| Borrowable | No | No | No |
| Collateral Enabled | No | No | No |
| Supply Cap | 32,000 | 2,200 | 4,400 |
| Borrow Cap | - | - | - |
| Debt Ceiling | - | - | - |
| LTV | - | - | - |
| LT | - | - | - |
| Liquidation Bonus | - | - | - |
| Liquidation Protocol Fee | 10% | 10% | 10% |
| Variable Base | - | - | - |
| Variable Slope1 | - | - | - |
| Variable Slope2 | - | - | - |
| Uoptimal | - | - | - |
| Reserve Factor | - | - | - |
| Stable Borrowing | Disabled | Disabled | Disabled |
| Flashloanable | No | No | No |
| Siloed Borrowing | No | No | No |
| Borrowable in Isolation | No | No | No |
| E-Mode | 1 | 2 | 2 |
Arbitrum
| Parameters | Value |
|---|---|
| Asset | sWBTC |
| Isolation mode | No |
| Borrowable | No |
| Collateral Enabled | No |
| Supply Cap | 270 |
| Borrow Cap | - |
| Debt Ceiling | - |
| LTV | - |
| LT | - |
| Liquidation Bonus | - |
| Liquidation Protocol Fee | 10% |
| Variable Base | - |
| Variable Slope1 | - |
| Variable Slope2 | - |
| Uoptimal | - |
| Reserve Factor | - |
| Stable Borrowing | Disabled |
| Flashloanable | No |
| Siloed Borrowing | No |
| Borrowable in Isolation | No |
| E-Mode | 3 |
Base
| Parameters | Value |
|---|---|
| Asset | scbBTC |
| Isolation mode | No |
| Borrowable | No |
| Collateral Enabled | No |
| Supply Cap | 400 |
| Borrow Cap | - |
| Debt Ceiling | - |
| LTV | - |
| LT | - |
| Liquidation Bonus | - |
| Liquidation Protocol Fee | 10% |
| Variable Base | - |
| Variable Slope1 | - |
| Variable Slope2 | - |
| Uoptimal | - |
| Reserve Factor | - |
| Stable Borrowing | Disabled |
| Flashloanable | No |
| Siloed Borrowing | No |
| Borrowable in Isolation | No |
| E-Mode | 4 |
Segregated ETH Stablecoin E-Mode #1
(Ethereum Core)
| Parameter | Value | Value | Value | Value | Value |
|---|---|---|---|---|---|
| Asset | sWETH | Others (LTV0) | USDC | USDT | GHO |
| Collateral | Yes | Yes | No | No | No |
| Borrowable | No | No | Yes | Yes | Yes |
| Max LTV | 85.50% | 0.00% | - | - | - |
| Liquidation Threshold | 87.50% | 87.50% | - | - | - |
| Liquidation Bonus | 4.00% | 4.00% | - | - | - |
Segregated BTC Stablecoin E-Mode #2
(Ethereum Core)
| Parameter | Value | Value | Value | Value | Value | Value |
|---|---|---|---|---|---|---|
| Asset | sWBTC | scbBTC | Others (LTV0) | USDC | USDT | GHO |
| Collateral | Yes | Yes | Yes | No | No | No |
| Borrowable | No | No | No | Yes | Yes | Yes |
| Max LTV | 82.50% | 82.50% | 0.00% | - | - | - |
| Liquidation Threshold | 84.50% | 84.50% | 84.50% | - | - | - |
| Liquidation Bonus | 4.00% | 4.00% | 4.00% | - | - | - |
Segregated BTC Stablecoin E-Mode #3
(Arbitrum)
| Parameter | Value | Value | Value | Value | Value |
|---|---|---|---|---|---|
| Asset | sWBTC | Others (LTV0) | USDC | USDT | GHO |
| Collateral | Yes | Yes | No | No | No |
| Borrowable | No | No | Yes | Yes | Yes |
| Max LTV | 82.50% | 0.00% | - | - | - |
| Liquidation Threshold | 84.50% | 84.50% | - | - | - |
| Liquidation Bonus | 4.00% | 4.00% | - | - | - |
Segregated BTC Stablecoin E-Mode #4
(Base)
| Parameter | Value | Value | Value | Value |
|---|---|---|---|---|
| Asset | scbBTC | Others (LTV0) | USDC | GHO |
| Collateral | Yes | Yes | No | No |
| Borrowable | No | No | Yes | Yes |
| Max LTV | 82.50% | 0.00% | - | - |
| Liquidation Threshold | 84.50% | 84.50% | - | - |
| Liquidation Bonus | 4.00% | 4.00% | - | - |
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this recommendation.
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