Overview
In light of recent market volatility and specific on-chain observations regarding FBTC, LlamaRisk has conducted a due diligence assessment of the asset’s liquidity profile and concentration risks on Aave V3 Ethereum.
While the FBTC market does not exhibit signs of acute instability, observed secondary-market liquidity has been faltering, and concentration risk has emerged around specific large suppliers. Given these conditions, adjustments to the asset’s caps to better align with available exit liquidity are advised. Hence, to materially constrain Aave’s exposure to tail risks associated with concentrated positions and thin liquidity, we propose a reduction of the supply and borrow caps for FBTC on Aave Core.
FBTC Analysis
Liquidity & Redemption
On-chain analysis indicates that secondary-market liquidity for FBTC is relatively thin relative to current supply caps. Current depth allows for approximately $3.7M in stablecoin exit liquidity within a 7.5% price impact. During last week’s period of excessive volatility, sell-side stablecoin liquidity fluctuated, bottoming out near $2.5M.
Furthermore, the vast majority of sell-side liquidity is concentrated in a single Uniswap V3 WBTC/FBTC pool (approx. $6.23M WBTC + $0.71M FBTC).
Source: Dune, February 11, 2026
The DEX liquidity composition of the Uniswap V3 pool has remained stable at daily granularity over the past 6 months, indicating that the pool’s arbitrage remains effective.
User Positioning & Concentration
A specific risk factor identified is the concentration of supply. The largest supplier on Aave (associated with Sentora) currently maintains a Health Factor near 1.24 and holds an approximately $17.5M PYUSD debt position, accumulated largely throughout early February 2026, even as the BTC price experienced sharp downturns.
Source: Chaos Labs Community Dashboard, February 11, 2026
Operational Considerations
The total supply of FBTC on Mainnet is roughly 45% down from all-time highs in 2025, but no mass burns have been observed recently; the supply has rather been stagnant for the past three months.
Source: Dune, February 11, 2026
A notable operational event occurred on January 13, 2026, where five addresses were temporarily frozen and subsequently unfrozen. The users were:
- PumpBTC: FBTC Staking - 0.6053 FBTC
- Multisig1 - 0.2002 FBTC, 2/3 Safe
- FBTC ERC20 - 0.00029 FBTC
- 0x8a07…d8c5 - 0 FBTC, 2/3 Safe on BSC having 2 common owners as Multisig1
- 0x2b4b…bb5e - 0 FBTC, PumpStaking (Proxy) on BSC
While these addresses held minimal balances (<1 FBTC) and the action may have been for operational reasons, it highlights anomalies warranting further investigation.
Recommendation
To adequately size the capacity to current activity while anchoring the exposure in line with the available on-chain liquidity, we recommend a precautionary reduction of the Supply Cap to 350 FBTC and the Borrow Cap to 1 FBTC. This adjustment aims to limit additional exposure, specifically by preventing further origination of FBTC-backed loans, including concentrated positions. Minimal adverse consequences are expected for current users, in the form of losing the ability to add FBTC collateral to currently exisiting positions. Nevertheless, any other collateral asset can be added to the currently existing positions, including BTC-correlated assets.
Specification
The table below outlines the proposed cap adjustments.
| Instance | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum Core | FBTC | 1,800 | 350 | 100 | 1 |
Next Step
This change will be included in the next Risk Steward caps update batch, as coordinated with @ChaosLabs.
Disclosure
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.