By Liam 'Akiba' Wright, cryptoslate
Compiled by: Saoirse, Foresight News
As of September 25, Aave’s Base market allows seven Coinbase equity tokens to be used as USDC loan collateral, and stablecoin lenders who choose to participate in the pool will bear the risk of weekend price gaps. Aave Labs said on September 25 that its V4 Equity Center is officially operational after temporary restrictions are lifted. This Mag-7 lending branch sets a USDC borrowing limit of $21 million, which is the limit on the amount borrowed, not the size of what has been loaned out currently.
The Aave lending system remains open, but oracle prices for stock collateral are locked to Friday’s prices until Sunday evening. Borrowers will still be able to trade tokens during the weekend, but the protocol will only be able to identify situations where the health of a position has deteriorated due to falling stock prices, after the oracle resumes quoting. If the liquidator is unable to fully recover assets from the seized tokens after the oracle re-quotes, this optional USDC lending pool may generate bad debts.
The data source is closed, but the market is still tradable
AAPLc, AMZNc, GOOGLc, METAc, MSFTc, NVDAc, TSLAc can only be used as collateral; borrowers can only lend USDC from this exclusive fund pool. Risk service provider LlamaRisk is responsible for formulating the initial parameters of the market and explaining that USDC lenders voluntarily assume such equity exposures and the risks will not be transmitted to other Aave markets.
The Chainlink equity oracle combines the underlying stock price with the Coinbase issuer multiplier. LlamaRisk sets the oracle running period from Sunday 20:00 to Friday 20:00 EST. From Friday evening to Sunday evening, and during U.S. stock market holidays, the oracle will maintain the last quote and will no longer push new prices. The Aave market itself is still open for deposits, borrowing and clearing operations, and stock tokens can also be traded on the chain.
Therefore, the price-based health indicators of collateral positions do not reflect the latest market information during oracle outages. Even if the oracle quotation is frozen, the interest generated by the USDC loan may still cause the position to hit the liquidation threshold. If the price of the underlying stock falls and the position is no longer safe, the position will not become liquidable until the oracle resumes quotation on Sunday evening and updates the price in one go. Liquidators will then be required to hold the seized collateral exposure until U.S. stocks enter deep trading on Monday.
The original ARFC proposal (Aave Request for Comments Proposal) mapped out a different approval process. Aave Labs stated before the implementation that this market activation is based on the Snapshot voting results and the protocol security committee can directly lift the suspension status of the deployed market without voting through AIP or Aave V3 governance. A follow-up confirmation message indicated that the committee had completed the action. An independent risk manager configuration still requires AIP proposal approval.
The Mag-7 branch has a borrowing limit of $21 million, while USDC deposits are capped at $32 million. The deposit cap limits the total amount of USDC that can be deposited into this subpool; neither value represents current deposits, borrowing, or funding utilization. The collateral factors for the 7 stock tokens range from 65% to 79%. LlamaRisk said that in Aave V4, the collateral coefficient determines both the borrowing limit and the liquidation threshold of each token.
These safety buffers are used to cover price drops between when a position is liquidated and when the liquidator completes the closing. LlamaRisk's stress testing method refers to the historical fluctuations of U.S. stocks after hours, allowing a 0.5% deviation between the oracle quotation and the real market; during the longest rest period, the debt accrues interest based on the 24% annual cap of the USDC borrowing interest rate curve. The model assumes liquidation will be completed within 5 minutes of the next regular open for U.S. stocks. The collateral coefficient of each target is calculated based on the historical maximum decline and statistical tail risk.
This set of parameters is only a model of the losses that can be tolerated under the design goals of the protocol, and there is no guarantee that risks will not occur in the next market closing period. LlamaRisk pointed out that historical data cannot cover extreme declines that have never occurred. A liquidation reward of up to 5.5% to compensate the liquidator for costs incurred in selling, redeeming or hedging tokens after repaying USDC debt. Whether this incentive is sufficient depends on the market price and executable liquidity when liquidation occurs.
This picture visually displays the unique risks of the Aave equity token lending pool: the oracle is frozen over the weekend, and the price is revalued one-time on Monday (Sunday night in the US East); if there is a large gap and insufficient token liquidity, it may trigger liquidation and generate bad debts.
The disposal path determines the party responsible for the gap loss
The liquidator gets hold of the seized B20 tokens and cannot automatically redeem the underlying shares. The LlamaRisk technical assessment report shows that when buyers in the secondary market receive tokens, they have an unvested position initially and need to complete the vesting process controlled by the issuer before redemption can be carried out. Liquidators who are not eligible for redemption can sell tokens on the Base chain, find counterparties who are eligible for redemption, or use hedging tools while waiting for liquidation. The perpetual futures hedging solution mentioned in the risk assessment is only a model assumption, and there is no guarantee that there will be sufficient hedging capacity for each liquidation.
The depth of the secondary market is weak, and large forced selling will have a significant impact. LlamaRisk quoted data from September 17, before the market went online, to estimate that the scale of the sell-off resulting in a 2% price impact was approximately US$270,000 to US$1.08 million for a single token. This data is only a historical snapshot and does not represent the actual size of the sell-off that could have occurred at the time of liquidation on September 27. The disposal of larger-scale collateral requires splitting the order or transferring it to a counterparty with redemption rights.
If after the liquidation and disposal of the seized tokens, the USDC debt can be fully repaid and the full value recovered, there will be no gap in the capital pool. However, if the opening price gap exceeds the model buffer, or the seized tokens cannot be sold or hedged at the preset price and speed, the equity fund pool will generate bad debts. The USDC lender of the pool is responsible for this part of the funding gap; the risk document describes only a scenario deduction, not the actual losses that have occurred. The quota limit limits the maximum borrowing size in the market, and the real-time risk level depends on the existing loans, position size, and liquidity at the time of the oracle update.