Half of Aave's Debt in 9% of Positions: Ethereum Correlation Trade Exposed

Aave's E-mode borrowers hold nearly half of the platform's debt, but account for less than 9% of positions. These borrowers are using Aave's E-mode setting to take on higher borrowing limits when collateral and debt are expected to move together.

Galaxy found that Ethereum staking and restaking wrappers make up about 66.2% of the collateral backing these loans, with weETH alone accounting for roughly 42%. On the other side of the ledger, WETH makes up about 73% of the group's debt.

The concentrated bet on Ethereum's staking basis and the relationship between these liquid-staking tokens and ETH puts E-mode borrowers at risk if the wrapper price drops relative to ETH. A rough proportional model suggests a broad-basis discount in the high single digits, around 8-9%, could push the average E-mode health factor toward 1.

Galaxy's analysis found that even a 3% discount would start to make borrowers sensitive, and a 10% discount would lead to 205 accounts below a health factor of 1, forcing forced deleveraging in the ETH-staking loop.