Summary
LlamaRisk supports the proposal from Chaos Labs to introduce a cbBTC Stablecoin E-Mode on the Aave V3 Base instance. From a risk perspective, the creation of this E-Mode is justifiable and presents a compelling opportunity to enhance capital efficiency for cbBTC collateral, potentially increasing USDC and GHO borrowing demand and generating additional revenue for the protocol.
This proposal marks a new application of Aave’s E-Mode feature. Historically, E-Modes have been implemented for highly correlated assets, such as liquid staking/restaking tokens against their underlying base asset (e.g., wstETH/WETH) or for a basket of stablecoins. Applying E-Mode to a less correlated pair, such as cbBTC and stablecoins, introduces a new dynamic and, consequently, incremental risks. However, cbBTC’s stable liquidity, robust price stability relative to its underlying asset, and conservative borrowing behavior on the Base network suggest that the associated risks are contained. The proposed parameters are calibrated to balance increased utility with prudent risk management.
Market Risk
The primary market risks associated with any collateralized debt position are tied to the volatility of the collateral and the ability to efficiently liquidate positions that fall below health thresholds. The profitable and timely processing of liquidations is highly dependent on the price dynamics of the asset and the depth of liquidity available on DEXs.
Our analysis of the 6-month BTC price volatility via Chainlink’s BTC/USD price feed, which serves as the oracle for cbBTC, shows that the returns between price updates are highly concentrated around zero, indicating general price stability. However, the distribution is fat-tailed, with occasional sharp price movements that have historically reached up to ±1.5% per update. The cumulative effect of these price changes has resulted in a maximum observed drawdown of approximately 15% over the analyzed period. The buffer that is provided by the currently proposed LT is adequate in comparison with the observed volatility.
Source: Chainlink BTC/USD Price Feed, September 29, 2025
Furthermore, an examination of historical liquidations and borrower behavior on the Aave V3 Base market reveals that users collateralizing with cbBTC have generally operated with conservative health scores. Even during periods of significant BTC price volatility, large-scale liquidations have been limited, indicating that borrowers on Base are more conservative with their margins. The liquidity for cbBTC on Base, sufficient to absorb significant liquidation volumes with minimal slippage (~1.5% for a 200 cbBTC sale), provides strong assurance that the liquidation mechanism will remain effective under the proposed E-Mode parameters.
Parameters Comparison
To contextualize the proposed changes, we have compared the current cbBTC risk parameters on Aave with those on a competing protocol, Morpho, and the proposed parameters for the new E-Mode. Currently, the parameters for cbBTC are identical across Aave’s Core (Ethereum) and Base markets.
Source: Aave Dashboard, September 29, 2025
The proposed E-Mode parameters would make Aave more competitive against platforms like Morpho, which currently offer higher capital efficiency for cbBTC collateral. The corresponding reduction of the Liquidation Bonus to 4.0% is well-supported by the deep on-chain liquidity, ensuring liquidators are adequately incentivized without unduly penalizing borrowers. This tailored approach allows Aave to enhance its competitiveness while isolating the increased risk to a specific borrowing category (i.e. stablecoins), aligning with best practices for risk management.
| Parameter | Aave V3 (Core & Base) | Morpho | Proposed E-Mode |
|---|---|---|---|
| Max LTV | 73.00% | up to 86.00% | 80.00% |
| Liquidation Threshold | 78.00% | up to 86.00% | 83.00% |
| Liquidation Bonus | 5.00% | up to 4.38% | 4.00% |
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.