Aave’s New Merit Program Boosts cbBTC Holdings, Highlights Emerging Strategy Risks

In just one week, @aave has seen a 2.7k BTC (~$200M) spike in cbBTC deposits, following the launch of a new Merit program on October 24.

The incentive initiative encourages users to lend cbBTC (Coinbase-wrapped BTC) and borrow USDC, resulting in cbBTC becoming the fourth most popular asset for USDC-backed loans, now making up 12% of all collateral in the platform’s borrowing pool.

This development has inspired a growing strategy in Aave’s ecosystem: users can lend cbBTC, borrow USDC, and then re-lend USDC. The strategy has contributed to an increase in USDC debt share, which rose by 2% overall and even reached 7% at its peak, as users took advantage of the Merit program to recycle their assets within the platform.

1/ The amount of $cbBTC in @aave has increased by 2.7k BTC (~$200M) in a week following the launch of a new merit program pic.twitter.com/c5dd9ZlEgL

— IntoTheBlock (@intotheblock) October 30, 2024

Major Risk To Monitor 

However, this strategy carries an overlooked risk. If a major USDC provider—referred to as a “whale”—decides to exit the market, users heavily invested in this approach could face challenges unwinding their trades. A sudden drop in available liquidity could mean users are temporarily unable to repay their loans, leaving them exposed to market volatility until liquidity stabilizes.

This Merit program has brought significant growth to Aave’s cbBTC holdings, but it also underscores the importance of assessing potential risks in recursive lending strategies, especially in a market heavily influenced by large stakeholders.

Disclosure: This is not trading or investment advice. Always do your research before buying any cryptocurrency or investing in any services.

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