LlamaRisk Proposal Repositions Aave Core With $1.33 Billion in Collateral
Key Facts
LlamaRisk has proposed refocusing the Aave V3 Core market on established, liquid collateral, while assigning a broader range of asset classes to Aave V4. The proposal estimates the covered collateral at $1.33 billion, against $1.03 billion in debt backed by it, based on a snapshot from November 9, 2026. The scope includes rsETH, osETH, LBTC, tBTC and rETH, alongside other, less exposed reserves. The proposal aims to stop the growth of exposure to this collateral, which it said relies on additional layers of risk. The aggregate figure does not mean all assets would be frozen for the first time, as both rsETH and tBTC were already frozen on Core.
The proposed initial step is to halt new supply and borrowing against each covered asset and set the loan-to-value ratio to zero, including in E-Mode configurations to which the asset belongs. Existing positions would remain open after the freeze, and borrowers could repay loans, withdraw assets or move collateral elsewhere. The initial measure therefore does not call for the immediate or automatic liquidation of existing positions. The proposal says lowering liquidation thresholds or adjusting borrowing rates could be considered later if exposure does not decline. The path to reducing existing positions is therefore tied to subsequent decisions, not the initial freeze alone.
The largest concentration of exposure is in WETH-denominated debt backed by rsETH and osETH, totaling $862 million. The proposal says most of it comes from leveraged borrowing loops in Ethereum-related configurations. LBTC, tBTC and rETH together back $160 million in debt, mostly in stablecoins. LlamaRisk says higher-risk collateral relies on layers such as restaking, leveraged strategies, bridges and custody. The proposal said the additional yield associated with these assets goes to borrowers who loop their borrowing, rather than to liquidity suppliers. This puts the structure of the exposure and the nature of the collateral at the center of the proposed repositioning.
According to the November 9 snapshot, LBTC has $177.4 million in collateral backing $72.1 million in debt, of which USDT and USDC account for 97%. tBTC had been frozen on Core since October 31; its collateral totaled $117.4 million against $52.9 million in debt spread across 309 borrowing positions. rETH had $81.8 million in collateral against $35.4 million in debt across 317 positions, with USDC accounting for 67% of that debt and USDT 20%. The proposal estimates that the covered debt generates about $3.7 million a year in revenue for the decentralized autonomous organization, based on average realized borrowing rates over the previous three months. The estimate does not include capital migration or alternative borrowing flows.
The proposal builds on two previous rounds in which 71 reserves were reduced across 11 deployments, alongside the full closure of six markets whose total supply was about $98 million. In the case of rsETH, the proposal says the asset has been frozen on Core at a zero loan-to-value ratio since April 2026. Its supply fell 45%, from 525.8 thousand to 290.7 thousand tokens as of November 9, while 69% of the remaining debt is concentrated in the three largest positions. The proposal says osETH backed $256.6 million in WETH debt at leverage of about 14 times, and that its supply reached 122.9 thousand tokens, nearing the 123 thousand cap. The ten largest positions back 66% of osETH debt, according to the proposal's data.
Representatives of two issuers objected to including osETH and rETH in the combined treatment and asked for each asset to be assessed separately. The founder of StakeWise said the company's liquid staking service has operated since January 2021 without hacks or validator slashing, and that osETH has been used as collateral on Aave for 2.5 years. A Rocket Pool representative asked that rETH be excluded from the proposal, saying its supply had remained at the 35 thousand token cap since November 6. The representative added that the token is backed by staked Ethereum, without restaking, leverage, derivatives or a bridge. These responses set requests to treat the two assets separately against the proposal's approach of grouping several reserves in one repositioning.
If approved, the proposal's initial measures would be submitted as an AIP, or on-chain governance proposal. It says LlamaRisk would then engage with issuers and major borrowers and publish a monthly report on progress in reducing exposure. The proposal sets no calendar date for a vote or implementation. If exposure does not decline, the proposal allows for the liquidation threshold for LBTC, tBTC and rETH to be lowered later in steps of no more than two percentage points, provided the collateral made liquidatable remains below $2 million or 5% of the asset's remaining collateral. It also identifies raising the WETH borrowing rate as a last resort, in increases of up to 100 basis points in steps of 50 basis points, no more than once a month.