Aave Proposes Dynamic Borrowing Caps for V3 Markets After $44.6 Million Loan
Key Facts
On November 11, LlamaRisk published a proposal for the first phase of LlamaGuard Caps on the Aave governance forum. The mechanism would set a limit on the pace of borrowing in Aave V3 markets. The post proposes creating a borrowing buffer above the outstanding debt for each reserve, so large borrowing cannot expand immediately without limits. LlamaRisk says the buffer refills automatically as ordinary demand uses it, and shrinks when large repayments open borrowing capacity beyond what the reserve needs. Under this design, routine borrowing remains immediate, while large withdrawals wait for the buffer to refill. The proposed delay gives the "Protocol Guardian" time to respond to illicit activity, according to LlamaRisk. The post is an ARFC proposal submitted by LlamaRisk to the forum; no vote or approval decision was shown.
The proposal focuses on slowing debt growth when malicious collateral has a true value below the oracle’s valuation, or when stolen or non-freezable assets are used to borrow quickly. The mechanism separates increases to the cap from decreases through two agents: the increase agent adds borrowing capacity as ordinary demand consumes the buffer, while the decrease agent removes capacity opened by repayments and liquidations when it exceeds the reserve’s needs. This gradual approach is intended to limit the pace of borrowing in unusual conditions while preserving rapid access to liquidity in normal use. The design does not impose one fixed cap on every transaction; instead, it links available capacity to borrowing and repayment activity in the reserve. LlamaRisk says large, known borrowers, including integrated institutional clients, can be served through a batched transaction by "Risk Stewards" that raises and consumes the cap in the same transaction. The proposal also allows borrowing to be split into batches or the decrease to be temporarily paused when demand persists.
Flash loans repaid within the same transaction are excluded from the borrowing cap, according to the proposal. LlamaRisk therefore says refinancing and collateral swaps completed in a single transaction are unaffected by the constraints. Borrowing that remains outstanding after the transaction counts against the reserve’s available capacity and is subject to the buffer’s refill pace. The design proposes calculating increases to the borrowing cap through Chainlink CRE and enforcing the constraints onchain. The system adds four new contracts, a Chainlink CRE workflow and a keeper service, according to the post. LlamaRisk says the core Aave contracts, AgentHub, RiskOracle and Router will remain unchanged.
Initial calibration was based on a minute-by-minute replay of V3 reserve data from October 15, 2025, to October 15, 2026. LlamaRisk used a guideline buffer equal to 10% of debt, with a floor of $1 million and a ceiling of $25 million. The document describes these figures as indicative calibration values, to be adjusted for each market and reserve and shared with the community before deployment. The parameters can also be recalibrated later within governance limits. In its analysis of past incidents, LlamaRisk said an indicative delay of 30 minutes would have allowed one or two refills before a response. The document compared this with a 60-minute delay, saying it would have added friction for core borrowers without providing additional protection when a response arrives within about 30 minutes.
The proposal follows a borrowing incident on October 29, when a wallet in an exploiter cluster linked to the Binance hot wallet breach deposited 60 million USDT as collateral on Aave V3 Ethereum Core and borrowed 19,762 WETH, valued at about $44.6 million at the time. LlamaRisk said the borrowing took place about 40 minutes before the first market freeze, at 21:42 UTC, and that no exploiter wallet interacted with Aave after 21:01. The freeze halted the opening of new deposit or borrowing positions, while repayments, withdrawals and liquidations continued. The action covered 175 reserves on Aave V3 across 16 networks and 117 reserves on Aave V4 across four networks, according to a LlamaRisk update. In the rsETH incident in April, an Aave report said the attacker exploited the bridge route from Unichain to Ethereum and that 116,500 rsETH was released, while confirming that Aave’s smart contracts were not compromised. These incidents provide context for a mechanism targeting the pace of borrowing, while the document acknowledges that it does not fully prevent, detect or contain exploits, and does not eliminate smart contract, oracle, liquidity, depeg or total-loss risks.
Proposed later phases include setting the upper cap based on live liquidity conditions, then extending dynamic protection to deposit caps, Aave V4 markets and cross-market modules. The post set no timetable for these steps and reiterated that calibration values would be adjusted for each market and reserve and presented to the community before deployment. In trading, AAVE/USD closed at $120.7 on November 11, compared with a close of $131.64 on November 9, according to EL7 data. In a separate update dated October 30, LlamaRisk recommended a temporary reduction in Slope2 for specific reserves, aiming to keep the variable borrow rate below 10.00% annually at full utilization. That earlier update illustrates another aspect of borrowing management, while the LlamaGuard Caps proposal remains at the discussion stage on the governance forum.