LlamaRisk, one of Aave’s risk service providers, posted a proposal on the Aave governance forum at 19:33 UTC on Tuesday to turn V3 Core into a market for “liquid, bluechip collateral”. Restaking tokens, bridged and wrapped bitcoin and a few long-tail reserves would be frozen, or stay frozen, and nudged towards Aave V4, where each borrower pays a premium sized to the risk of their collateral.
It is a proposal for now. An ARFC (Aave Request for Final Comment) still needs a DAO vote before anything changes on-chain.
The rundown
- What changed: Freezing a reserve blocks fresh deposits and loans and sets the loan-to-value (LTV) ratio to zero, including in E-Mode, Aave’s high-leverage mode for correlated assets. Existing loans stay open and can be repaid, withdrawn or migrated. Frozen reserves with more than $20,000 of debt get a 99% reserve factor, so remaining interest goes to the DAO, not to suppliers.
- By the numbers: rsETH, a liquid restaking token (LRT), is the biggest at $661.8 million of collateral against $605.7 million of WETH debt. osETH follows at $279.4 million, then LBTC at $177.4 million, tBTC at $117.4 million and rETH at $81.8 million, LlamaRisk’s 9 Nov data show.
- Why it matters: Core is one shared pool: whoever lends WETH or stablecoins there is exposed to all of its collateral, at a single rate. LlamaRisk argues that restaking, leveraged wrapping, custom bridges and thin issuer security add risk that suppliers carry while the extra yield goes to borrowers looping them.
- Where it breaks: Most rsETH and osETH borrowing is looped in E-Mode, levered 12 to 14 times. A cut of just 2 to 5 points in the liquidation threshold would make most of that collateral liquidatable at once, LlamaRisk says, so it rules out abrupt changes. Its last resort is a higher WETH borrow rate to make the loops unprofitable, with rebates for other WETH borrowers.
The direction is not new. rsETH has been frozen on Core since April, and Aave froze tBTC on 31 Oct after Threshold paused minting. An earlier deprecation round wound down 71 reserves, and the market freeze after the Binance exploit showed how fast pooled risk travels.
What stays on Core: WETH, wstETH, weETH, cbETH, WBTC, cbBTC, the big stablecoins, XAUt, AAVE and LINK.
A cleaner Core with less to break. The cost is paid by the loopers.
Read the full proposal on the Aave governance forum.
This article is for information only and is not investment advice.