Aave Proposal Would Raise Bitcoin Borrowing Power but Shrink Liquidation Cushion

Aave’s governance has moved a proposal forward that would let borrowers use Bitcoin‑backed tokens (WBTC and cbBTC) as collateral with higher leverage on the Aave V3 Ethereum Core market. The change would raise the maximum loan‑to‑value (LTV) from 73% to 81% and increase the liquidation threshold from 78% to 85%.

Proposed Parameter Changes

According to the risk analysis from LlamaRisk, the key adjustments are:

• Maximum LTV for WBTC and cbBTC: 73% → 81%
• Liquidation threshold for WBTC and cbBTC: 78% → 85%
• Resulting price cushion (decline from LTV to liquidation point): ~6.4% → ~4.7%

Additional Market Adjustments

• Arbitrum WBTC LTV increased by 5 percentage points.
• Base cbBTC LTV increased by 8 percentage points.
• Ethereum Core WETH, wstETH and weETH LTV each increased by 0.5 points.
• Base cbBTC liquidation bonus reduced from 7.5% to 6%.
• Base cbBTC stablecoin E‑Mode set to 82% LTV and 85% liquidation threshold.

Rationale Behind the Proposal

LlamaRisk’s study of liquidation activity from August 2025 to August 2026 showed that 99th‑percentile liquidations were completed within five minutes of a price‑feed update. The analysis found no bad debt during two stress windows (February and October 2025) for the BTC‑family collateral, suggesting that rapid liquidator response can support higher capital efficiency.

Risks and Uncertainties

While the historical data indicate fast liquidation, the proposal narrows the buffer that protects borrowers from price swings. A maximally leveraged Bitcoin position could be liquidated after a roughly 4.7% decline in collateral price, compared with the current 6.4% cushion. The model also assumes that oracle feeds and liquidators remain functional during extreme moves; past one‑hour price drops of up to 10.7% for BTC exceed the percentile inputs used for the risk model.

Next Steps

The proposal has entered the Snapshot voting phase, with voting expected to start within 24 hours of the September 21 announcement. Implementation would only occur after a positive vote and the issuance of an AIP (Aave Improvement Proposal). Until then, the 81% LTV remains a governance proposal, not an active protocol setting.