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.