LlamaRisk Proposes Repositioning Aave with $1.33 Billion in Collateral
Key Facts
LlamaRisk has proposed repositioning the Aave V3 Core market, which includes $1.33 billion in collateral backing $1.03 billion in debt, according to data dated November 9, 2026, in its proposal published on the Aave governance forum. The plan begins by freezing the affected reserves, halting new supply and borrowing while keeping existing positions open. Borrowers would still be able to repay debt, withdraw collateral or unwind positions gradually. LlamaRisk said the repositioning is "designed to reduce exposure gradually and without forced liquidations." The proposal aims to focus Core on established liquid collateral and reduce its reliance on layered risks.
The largest exposures are concentrated in rsETH and osETH, alongside LBTC, tBTC and rETH. rsETH collateral totaled about $661.8 million against $605.7 million in WETH debt, while osETH collateral reached $279.4 million against $256.6 million in WETH debt, according to figures dated November 9, 2026. The proposal says rsETH and osETH together back $862 million in WETH debt, mostly through leveraged borrowing loops in Ethereum-linked E-Mode categories. LBTC, tBTC and rETH back $160 million in debt, mostly in stablecoins. These allocations give the proposal a defined scope for reducing exposure, with most WETH debt concentrated against rsETH and osETH collateral.
LlamaRisk links its rationale to Core collateral's growing reliance on risks beyond the tokens themselves, including restaking services, leveraged strategies, cross-chain bridges and custodial arrangements. The company says this reliance expands the layers of risk facing the market, and wants to prioritize established assets and strategies. The proposal says rsETH and osETH positions use WETH borrowing loops within E-Mode at leverage of 12 to 14 times. LlamaRisk warns that lowering the liquidation threshold by 2 to 5 points could make most of this collateral immediately eligible for liquidation. The plan therefore puts freezing and communication with position holders ahead of any gradual threshold reductions, rather than imposing broad liquidations immediately.
The risk-reduction plan involves a financial trade-off: LlamaRisk estimates that debt backed by the affected collateral generates about $3.7 million a year in gross DAO revenue. The estimate is based on average realized borrowing rates during the three months before the proposal. The company also places the plan within an earlier effort to phase out low-utilization assets, which it says covered 71 reserves across 11 deployments, as well as 6 entire markets with total supply of about $98 million. These figures provide an execution precedent for the current proposal, while also highlighting its greater scale compared with the markets covered by the earlier effort. The proposed reduction in exposure remains tied to balancing collateral risks against revenue from existing debt.
The proposal presents Aave V4 as a potential alternative structure for assets that may leave V3 Core. Under this design, liquidity remains in pools, while collateral is placed in separate units with their own deposit and withdrawal limits. It also adds a collateralRisk factor that applies a premium to each borrower's borrowing rate based on the risk of their collateral. This approach reflects LlamaRisk's aim to separate liquidity from collateral risk more precisely. According to the proposal, it would provide a different path for hosting assets that do not remain within the proposed focus of the Core market.
The rsETH incident report issued in April 2026 provides additional context on the bridge risks discussed in the proposal. The report said an external exploit of the Kelp bridge route on April 18 caused 116,500 rsETH to be released from the adapter on Ethereum without a corresponding burn on the source chain. It added that Aave's contracts were not compromised. The proposal cites this type of reliance on external infrastructure among the layers of risk it wants to reduce in Core. LlamaRisk thus links limiting eligible collateral with reducing exposure to risks that do not originate in the token alone.
After an approval vote, LlamaRisk says the initial measures will be submitted in an onchain AIP proposal, followed by outreach to asset issuers and the largest borrowers. It plans to publish monthly updates on progress in reducing exposure. If exposure does not decline after outreach, the proposal authorizes gradual reductions in the liquidation threshold for LBTC, tBTC and rETH. Each step would be capped at 2 percentage points, while collateral newly made eligible for liquidation must remain below $2 million or 5% of the asset's remaining collateral. The proposal describes increasing the borrowing rate as a last resort if the gradual transition fails.