Summary
LlamaRisk endorses an increase in AAVE’s LT/LTV parameters, originally set in 2023 during the Aave V2-to-V3 migration. By raising these limits, the protocol can unlock greater borrowing capacity for its users without significantly increasing risks. After thoroughly reviewing asset utilization and liquidity metrics, we conclude that these adjustments can be implemented safely.
While expanding borrowing capacity against a protocol’s native token is typically discouraged, current market usage and robust liquidity support a cautious relaxation of these parameters. Moreover, AAVE is an excellent candidate for integration with the Umbrella system, which enables secure optimization of individual reserves via siloed insurance funds. Asset usage will be monitored continuously to ensure liquidation events remain reasonably profitable under all market conditions.
Current Asset Usage
The AAVE market on V3 Core is currently at 59.47% of its supply cap, with 1.10M tokens (approximately $270M) being supplied. This market is relatively stable in terms of supply variability.
Source: Aave Token Market, Aave App, February 9, 2025
More than 75% of the borrows against this asset are in stablecoins, with USDC leading, GHO in second place, and USDT in third. Approximately 97% of the assets borrowed against AAVE consist of USD stablecoins or BTC wrappers. These assets exhibit lower volatility than more niche assets, thus reducing the risk of unintended liquidation.
Source: Borrow Distribution for Aave, Chaos Labs Community Analytics, February 9th, 2025
Source: Large Position Analytics, Chaos Labs Community Analytics, February 9th, 2025
AAVE borrowers are very conservative. Larger AAVE positions are heavily overcollateralized and generally insulated from intraday market volatility. The most aggressive borrowers typically utilize alternative collaterals (e.g., WETH and rETH as used by 0xa2e4) to hedge against liquidation risk.
Source: AAVE Value at Risk by Chain, Chaos Labs Community Analytics, February 9th, 2025
This results in limited risk exposure should the market price of AAVE decline rapidly. Under current conditions, only approximately $2.5M would be liquidated if AAVE’s price dropped by 25%. In contrast, the WBTC market could see around $70M liquidated with the same percentage decrease.
As an asset with a large market cap, AAVE has not experienced a 50% or greater price decline in a single day since 2021. Consequently, it is unlikely to undergo the volatility required to trigger massive liquidations in the short term.
Source: Messari, February 10th, 2025
Source: AAVE to ETH Token Swap Modelling, DeFiLlama Liquidity, February 9th, 2025
AAVE on-chain liquidity is robust, with a $32M trade having approximately a 7.5% impact. This indicates that AAVE’s current supply cap is roughly 8.5 times its market liquidity, which could pose challenges if borrowers become significantly more aggressive with their positions. As noted in Chaos Labs’ Value at Risk modeling, even a 50% decrease in AAVE’s price would only result in around $25M coming into the liquidation range—an amount that current market liquidity can absorb.
Risks of This Change
This new parameter adjustment introduces primarily an economic risk. As noted by @MarcZeller leading DeFi platforms typically avoid undue exposure to their native governance token. Such risk arises because significant token price fluctuations can trigger deleveraging spirals if market participants lose confidence in the protocol. Similar scenarios have been observed in DeFi, most notably during the Terra/Luna collapse.
In the context of Aave, such fluctuations could generate bad debt, further depreciating the token’s value as more participants exit their positions—even before the AAVE-reliant safety module is activated. This would undermine the effectiveness of over-collateralization across the entire protocol. Although integration with the Umbrella system helps mitigate contagion risk through insurance segregation, bad debt may still be generated, potentially leaving depositors unable to withdraw their assets. Supply sinks, such as stkAAVE (soon to be deprecated), Balancer, and Uniswap LPs, generally help mitigate this.
Source: Aave V3 Total Liquidations, Kartoid via Dune, February 10th, 2025
The likelihood of this risk materializing is low. AAVE users generally maintain high health scores, as historical data shows that liquidations account for less than 5% of Aave V3 Core events. Furthermore, robust market liquidity ensures that even a trade volume five times the total of Aave V3 liquidations would enable liquidators to acquire positions profitably.
Aave V3 Specific Parameters
We endorse the LTV and LT parameters proposed by user @Leritu, which maintain a 7% differential between the two values.
Parameter |
V3 Core Instance |
Arbitrum |
Isolation Mode |
False (unchanged) |
False (unchanged) |
Emode |
N/A (unchanged) |
N/A (unchanged) |
Borrowable |
False (unchanged) |
False (unchanged) |
Borrowable in Isolation |
False (unchanged) |
False (unchanged) |
Collateral Enabled |
True (unchanged) |
True (unchanged) |
Stable Borrowing |
False (unchanged) |
False (unchanged) |
Supply Cap |
1.85M (unchanged) |
36K (unchanged) |
Borrow Cap |
N/A (unchanged) |
N/A (unchanged) |
Debt Ceiling |
N/A (unchanged) |
N/A (unchanged) |
LTV |
66% → 71% |
63% → 68% |
LT |
73% → 78% |
70% → 75% |
Liquidation Bonus |
7.5% (unchanged) |
10% (unchanged) |
Liquidation Protocol Fee |
10% (unchanged) |
10% (unchanged) |
Reserve Factor |
0% (unchanged) |
0% (unchanged) |
Base Variable Borrow Rate |
0% (unchanged) |
0% (unchanged) |
Variable Slope 1 |
7% (unchanged) |
7% (unchanged) |
Variable Slope 2 |
300% (unchanged) |
300% (unchanged) |
Uoptimal |
45% (unchanged) |
45% (unchanged) |
We do not recommend modifying AAVE’s parameters on Arbitrum (with $9.42M AAVE supplied), OP (2.11M AAVE supplied), or Polygon (16.43M AAVE supplied), as the potential benefits are marginal.
Disclaimer
This review was independently prepared by LlamaRisk, a community-led non-profit decentralized organization 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.