Aave Proposes Lending Against Collateral Held Off-Chain

Aave is proposing a significant change to its lending market that would allow institutions to keep their assets with regulated custodians like Anchorage while borrowing through Aave.

The proposal involves creating a non-transferable Custodied Collateral Token (CoCT) representing the balance held with the custodian, which Chainlink's CustodySync would use to keep the on-chain position aligned with the off-chain balance.

This setup means that if a position needs to be liquidated, Anchorage sells the underlying asset through an over-the-counter transaction, and Aave receives the proceeds to settle the debt. The CoCT is then burned after settlement.

This architecture is notable because it shows that regulated custody no longer has to be separated from on-chain credit.