Aave Weighs Higher Leverage for Bitcoin Borrowers Amid Narrowing Price Cushions

Aave is considering a proposal to increase borrowing limits for Bitcoin-backed borrowers on its Ethereum Core platform, from $0.73 to $0.81 against each dollar of WBTC or cbBTC collateral.

The proposal, put forward by risk service provider LlamaRisk, would also raise the liquidation threshold from 78% to 85%, effectively narrowing the price cushion for borrowers and making them more vulnerable to price dips.

LlamaRisk analyzed one year of liquidation data on Ethereum Core, Arbitrum, and Base, and found that economically meaningful positions were generally cleared within minutes. However, the model cannot account for liquidity, concentration, or oracle risks, and the worst one-hour declines in the dataset exceeded the recommended percentile inputs by a wide margin.

The proposed changes would extend beyond Ethereum Core, with increased borrowing limits for Arbitrum WBTC and Base cbBTC, as well as higher liquidation thresholds for various assets.