Some loans on the Aave platform, backed by yield-bearing collateral, are operating with tight liquidation buffers, according to an analysis by LlamaRisk on October 9. The most significant suppliers of PT-AUSD on Monad were all carrying debt, while two large positions in syrupUSDC accounted for nearly 97% of the supplied syrupUSDC on Arc. The process of cashing out this collateral involves either a market sale or, for Arc holders opting for Ethereum redemption, a withdrawal queue that can take hours.
The liquidation process for these loans presents a cash-flow challenge. If a borrower becomes eligible for liquidation, a liquidator must supply the borrowed stablecoin, receive the collateral, and then convert it into cash. For Monad's PT-AUSD loans, this requires a sale before maturity. Arc's syrupUSDC loans offer either a local sale or a bridge to Ethereum for redemption. The value of the collateral within Aave is determined by an oracle, but the actual recovery amount depends on the liquidator's exit strategy.
LlamaRisk's analysis recommended increasing the supply caps for both Monad and Arc to improve the economics of exiting these positions. On Monad, the top PT-AUSD suppliers had health factors ranging from 1.01 to 1.18, with a median of 1.03, indicating a narrow cushion against liquidation. These suppliers primarily used USDC and USDT0 as debt assets. The analysis also noted that borrowers often pair correlated collateral and debt to support higher leverage with smaller price changes.
For Monad's PT-AUSD loans, the collateral consists of Pendle principal tokens (PT-AUSD-17DEC2026), which represent claims on AUSD at maturity. Before maturity, these tokens must be sold into SY (Pendle's yield wrapper) and then redeemed into a supported output token. After maturity, PT can be redeemed directly into SY. The analysis highlighted the need to consider the intended sale size, output, and price impact when estimating the exit value. Additionally, the liquidation threshold and bonus for stablecoin E-mode were specified at 95% and 2.62%, respectively.
Arc's syrupUSDC loans face a different set of challenges. The two largest positions held approximately 97% of the supplied syrupUSDC, with health factors of 1.02 and 1.01. All outstanding debt among syrupUSDC suppliers was in USDC. The analysis noted substantial Aave liquidity in Arc, with 143.45 million USDC added to the Core Hub, 83.82 million drawn, and 59.63 million available. The liquidation process for syrupUSDC involves either a local sale or bridging to Ethereum for redemption, with the latter subject to bridge capacity, redemption cash, and financing duration constraints.
LlamaRisk's recommendations for Arc included increasing the USDC draw cap from 23 million to 46 million and the syrupUSDC add cap from 25 million to 50 million. The analysis emphasized the importance of comparing recoverable collateral proceeds with the debt repaid and total exit costs, as well as identifying who funds any redemption delay. The liquidation incentive affects how much collateral the liquidator receives, with Monad's PT requiring a market sale before maturity and Arc requiring local buyers or an Ethereum exit.