[Direct to AIP] Addition of Isolated Bluechip Collateral E-Modes on Aave v3

[ChaosLabs]

Overview

Chaos Labs recommends the creation of dedicated stablecoin E-Modes for bluechip collateral assets, specifically WETH, WBTC, and cbBTC on Ethereum, Base, Arbitrum and Avalanche. These E-Modes are designed to enable stablecoin borrowing under a isolated risk parameterization.

By isolating stablecoin borrowing within dedicated E-Modes, the protocol can offer improved capital efficiency for borrowers without expanding exposure beyond stablecoin debt against bluechip collateral assets. The flexibility introduced in v3.6 allows these E-Mode configurations to be adjusted or deprecated if conditions deteriorate, without impacting the underlying market parameterization or broader risk profile of the base asset markets.

This approach aligns with a protocol wide risk posture, balancing enhanced borrower efficiency with clearer risk boundaries.

On Base, where a cbBTC Stablecoin E-Mode with matching risk parameters already exists, the proposal modifies the existing E-Mode rather than creating a new one.

Rationale

Across major Aave v3 deployments, the primary use case for WETH, WBTC, and cbBTC as collateral is stablecoin borrowing.

On Ethereum mainnet, more than 95% of the borrowing activity backed by WETH is denominated in stablecoins, primarily USDT and USDC. In addition, the majority of WETH suppliers use WETH as their sole collateral asset and do not opt into cross margin exposure within the Core market.

Borrow Against Distribution of WETH - Core Market

A similar pattern is observed for WBTC and cbBTC. Borrowing activity backed by WBTC on Core markets exceeds 95% in stablecoins, while cbBTC exhibits a stablecoin borrowing share above 90%. These patterns indicate that volatile asset borrowing is not a material driver of demand for bluechip collateral, and that stablecoin access represents the dominant and persistent use case.

Borrow Against Distribution of WBTC- Core Market

Borrow Against Distribution of cbBTC- Core Market

Given this observed behavior, introducing isolated stablecoin E-Modes allows the protocol to better align risk parameterization with actual usage. By constraining borrowing to stablecoins while maintaining access to deep stablecoin markets for these bluechip collaterals, these E-Modes can support higher capital efficiency for borrowers without introducing additional exposure to reflexive debt.

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 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 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 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 Bluechip Stablecoin E-Mode.

ETH Stablecoin E-Mode

Ethereum Core

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

WSTETH, WBTC, USDC.e, TBTC, DAI, WEETH, LINK, RETH, AAVE, ARB

Avalanche
EURC, DAI.e, BTC.b, WAVAX, USDE, SUSDE, AUSD, LINK.e, AAVE.e, WBTC.e, sAVAX

Base

CBETH, WSTETH, USDBC, CBBTC, EURC, TBTC, WEETH, LBTC, AAVE

BTC Stablecoin E-Mode

Ethereum Core

WETH, WSTETH, WEETH, CBETH, RETH, SDAI, PYUSD, TBTC, USDS, FBTC, EURC, DAI, LUSD, ETHx, AAVE, OSETH, USDE, SUSDE, RSETH, LBTC, FRAX, EBTC, LINK

Arbitrum

WETH, WSTETH, USDC.e, TBTC, DAI, WEETH, LINK, RETH, AAVE, ARB

Base

WETH, WSTETH, USDBC, CBBTC, EURC, TBTC, WEETH, LBTC, AAVE, EZETH

Modification of the Existing cbBTC E-Mode

For all deployments covered in this proposal, new Bluechip Stablecoin E-Modes are introduced. The sole exception is the cbBTC Stablecoin E-Mode on Base, where an equivalent E-Mode already exists with matching risk parameters. In this case, the proposal does not introduce a new E-Mode, but instead modifies the existing cbBTC Stablecoin E-Mode to achieve strict collateral isolation.

The existing cbBTC Stablecoin E-Mode on Base allows stablecoin borrowing against cbBTC with an LT of 83%. However, collateral assets outside the E-Mode are not currently subject to the LTV0 rule, which permits users to maintain cross-margin positions by combining cbBTC with other collateral assets. Creating a new E-Mode to enforce collateral isolation would require migrating existing user debt, which would introduce unnecessary friction and negatively impact user experience.

Instead, this proposal preserves the existing cbBTC Stablecoin E-Mode and its parameters, while extending the configuration to include all non E-Mode collateral assets with LTV set to 0. This change enforces true collateral isolation without requiring any migration of existing positions.

Impact on Existing Cross-Margin Positions

For users who currently have the cbBTC Stablecoin E-Mode active while also supplying additional collateral assets outside of the E-Mode, the following mechanics apply after the modification:

• All collateral assets outside of the cbBTC Stablecoin E-Mode will be added to the E-Mode with maximum LTV set to 0.
• These assets will inherit the E-Mode LT of 83%.
• Health Factor may increase, as some of these assets has reserve level LT below 83%.
• Borrowing power will not increase, since the LTV0 rule.

Importantly, while Health Factor may improve, users will not be able to increase borrowing. To fully exit such positions, users must first remove collateral assets with LTV0 before withdrawing cbBTC, which preserves the intended non cross-margin structure of the E-Mode.

Assessment of Existing Cross-Margin Exposure

An assessment of current positions on Base indicates that the amount of collateral supplied outside of cbBTC in cross-margin positions with an active cbBTC Stablecoin E-Mode is limited.

In aggregate, approximately $3M of non cbBTC collateral is supplied across these positions. Of this amount, roughly $2.7M consists of ETH, which already carries a LT of 83% outside of E-Mode. As a result, the majority of these positions will experience no material change in Health Factor following the modification.

The remaining exposure is distributed across a small set of assets with lower reserve level LT, as summarized below.

Non cbBTC Collateral in Active Cross-Margin Positions
(Base cbBTC Stablecoin E-Mode)

Asset	Collateral Amount (USD)	Old LT	New LT
WETH	2,695,633	83%	83%
wstETH	127,255	79%	83%
cbETH	69,284	79%	83%
USDC	61,442	78%	83%
weETH	34,022	77%	83%
AAVE	5,513	65%	83%
ezETH	3,171	0%	83%
LBTC	459	73%	83%
tBTC	7	78%	83%

Recommendation

Chaos Labs recommends the introduction of dedicated stablecoin E-Modes for WETH, WBTC, and cbBTC across Ethereum, Base, Arbitrum, and Avalanche, with parameters calibrated to reflect observed borrowing behavior and onchain liquidity conditions. On Base, this is achieved by modifying the existing cbBTC Stablecoin E-Mode to enforce collateral isolation, rather than creating a new E-Mode.

These E-Modes are designed to improve capital efficiency for the dominant stablecoin borrowing use case of bluechip collateral, without introducing exposure to cross-margin dependencies, or volatile asset borrowing. Given the consistency of borrowing patterns across major markets and the depth of available stablecoin liquidity, Chaos Labs recommends proceeding with the proposed E-Mode configurations as specified.

Specification

ETH Stablecoin E-Mode

(Ethereum Core, Arbitrum and Avalanche)

Parameter	Value	Value	Value	Value	Value
Asset	WETH	Others (LTV0)	USDC	USDT	GHO
Collateral	Yes	Yes	No	No	No
Borrowable	No	No	Yes	Yes	Yes
Max LTV	83.00%	0.00%	-	-	-
Liquidation Threshold	85.00%	85.00%	-	-	-
Liquidation Bonus	4.00%	4.00%	-	-	-

ETH Stablecoin E-Mode

(Base)

Parameter	Value	Value	Value	Value
Asset	WETH	Others (LTV0)	USDC	GHO
Collateral	Yes	Yes	No	No
Borrowable	No	No	Yes	Yes
Max LTV	83.00%	0.00%	-	-
Liquidation Threshold	85.00%	85.00%	-	-
Liquidation Bonus	4.00%	4.00%	-	-

BTC Stablecoin E-Mode

(Ethereum Core)

Parameter	Value	Value	Value	Value	Value	Value
Asset	WBTC	cbBTC	Others (LTV0)	USDC	USDT	GHO
Collateral	Yes	Yes	Yes	No	No	No
Borrowable	No	No	No	Yes	Yes	Yes
Max LTV	81.00%	81.00%	0.00%	-	-	-
Liquidation Threshold	83.00%	83.00%	83.00%	-	-	-
Liquidation Bonus	4.00%	4.00%	4.00%	-	-	-

BTC Stablecoin E-Mode

(Arbitrum)

Parameter	Value	Value	Value	Value	Value
Asset	WBTC	Others (LTV0)	USDC	USDT	GHO
Collateral	Yes	Yes	No	No	No
Borrowable	No	No	Yes	Yes	Yes
Max LTV	81.00%	0.00%	-	-	-
Liquidation Threshold	83.00%	83.00%	-	-	-
Liquidation Bonus	4.00%	4.00%	-	-	-

BTC Stablecoin E-Mode

(Base)

Parameter	Value	Value	Value	Value
Asset	cbBTC	Others (LTV0)	USDC	GHO
Collateral	Yes	Yes	No	No
Borrowable	No	No	Yes	Yes
Max LTV	81.00%	0.00%	-	-
Liquidation Threshold	83.00%	83.00%	-	-
Liquidation Bonus	4.00%	4.00%	-	-

Disclaimer

Chaos Labs has not been compensated by any third party for publishing this recommendation.

Copyright

Copyright and related rights waived via CC0

[LlamaRisk]

Summary

LlamaRisk supports the proposal presented by Chaos Labs to introduce segregated bluechip E-Modes for WETH, cbBTC, and WBTC on Aave v3. This configuration ensures that borrowing power is strictly derived from the specific segregated bluechip assets, thereby containing the protocol’s risk to those specific reserves. This approach creates a clean, segregated risk environment that prevents the contagion of bad debt from broader market volatility while simultaneously allowing users to utilize a small array of assets to defend their positions, striking a superior balance between strict risk containment and user solvency management compared to previous iterations. However, this update may introduce additional user experience friction due to regular (cross-margined) borrowing and a new E-Mode choice for the same strategy. Ultimately, this friction needs to be mitigated at the UI level of the protocol.

Cross-Margin Considerations

While the proposal implements isolation via a maximum LTV of 0 for assets outside the specific E-Mode, this design choice offers a distinct advantage over complete isolation. By permitting the deposit of other assets without the LTV0 restriction (i.e. the bluechip stablecoins themselves), the system maintains a degree of cross-margin flexibility that is vital for user position self-management during volatile periods, aiming to avoid liquidations. This structure allows borrowers to deposit additional collateral not included under LTV0 specification to support their health factor without needing to swap to volatile bluechip collateral or repay loans immediately. This capability enables users to rapidly improve position health using a broader portfolio of assets, thereby reducing the likelihood of liquidation due to operational friction or lack of low-slippage liquidity. Therefore, the configuration effectively balances the requirement for segregated risk parameters with the practical need for portfolio diversification and emergency collateralization.

Impact on cbBTC E-Mode

A critical technical detail in this proposal regarding the cbBTC and WBTC E-Modes is the interaction between the LT of the segregated assets and the “Others” category configured with LTV 0. The proposal preserves the integrity of the user’s health factor by aligning the Liquidation Threshold of the LTV 0 assets with that of the primary E-Mode asset.

In a weighted average LT calculation, all LTV0 assets of the cbBTC Stablecoins E-Mode are assigned a higher LT; therefore, users currently supplying the to-be LTV0 collateral will receive a health factor boost (and a reduction of LB in some cases) compared to the asset’s standard configuration outside of E-Mode.

Possible Exposure to Boosted Collateral Efficiency

This technical behavior introduces a specific risk vector, particularly concerning the proposed modification of the existing BTC Stablecoin E-Mode on Base. Because this market is already active, it creates a window where users can anticipate the upgrade and use it to their advantage. A user could supply volatile collateral (e.g., AAVE) and enter the BTC E-Mode prior to the AIP implementation. Once the upgrade passes and AAVE is reclassified as an “Others (LTV 0)” asset, it will technically adopt the E-Mode’s LB of 4%, rather than its standard, higher bonus.

While this user cannot borrow additional funds against the AAVE collateral, the asset will then contribute to the position’s Health Factor with an 85% LT (instead of a regular 65% LT) post-upgrade, while offering liquidators a smaller 4% LB on a volatile asset, which may become problematic during liquidations where less liquid LTV0 assets are involved. Ultimately, the possible additional exposure is limited to the supply cap values of assets that have a non-zero LTV outside of E-Modes.

Overall Changes in Collateral Efficiency

The proposed parameters introduce a significant change in collateral efficiency for stablecoin borrowing strategies against bluechip assets. For WETH, the increase in LT from the current standard of 83%-84% to 85% in the segregated E-Mode offers a slight increase in leverage capability (x4.8 → x5.6).

Source: Aave Dashboard, January 28, 2026

The shift is more pronounced for BTC assets like WBTC and cbBTC, where the LT jumps from 78% to 83% (except for cbBTC on Base). This creates an environment of higher capital efficiency for looped strategies (x3.5 → x4.8 max. leverage) and moves BTC collateral efficiency closer to ETH. However, this increased efficiency is paired with a reduction in the LB from the standard 5% (or 7.5% for cbBTC) down to 4%.

Source: Aave Dashboard, January 28, 2026

Source: Aave Dashboard, January 28, 2026

While the high liquidity and reduced volatility of ETH and BTC relative to long-tail assets offer some justification for this tighter margin, a 4% bonus is aggressive for volatile assets. Unlike yield-bearing stablecoins or correlated borrowing strategies where price divergence is minimal, WETH and WBTC remain subject to significant market volatility. The reduction to a 4% LB narrows the profitability window for liquidators. If gas costs spike during a market crash, or if slippage increases during volatile events, a 4% margin may be too low to incentivize instant liquidations. This situation is also evidenced in the SVR recapture rates, where both cbBTC and WBTC show slightly lower recapture rates on the Aave Core market, indicating higher margins (in LB terms) required by the searchers.

Source: LlamaRisk SVR Dashboard, January 28, 2026

Recommendations

LlamaRisk endorses maintaining the ability for users to utilize a subset of low-risk collateral assets within these E-Modes to act as a buffer, ensuring user flexibility.

However, we recommend adjusting the proposed Liquidation Bonus from 4% to 5% across the BTC E-Modes. This would maintain a conservative safeguard for the protocol against liquidation failures during high volatility events without significantly degrading the collateral attractiveness for borrowers. In addition, the protocol would be more defensive in the case of additional exposure to boosted collateral efficiency collateral relevant to the existing cbBTC E-Mode on Aave.

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.