Aave faces mounting pressure as LlamaRisk pushes to raise USDe borrowing rates across five major markets, threatening the profitability of leveraged sUSDe yield strategies and exposing users to negative returns.
Borrowers who have been looping Ethena's USDe stablecoin through Aave to chase staking yields are now staring down a new threat: negative carry. The latest proposal from LlamaRisk would push up base borrowing rates for USDe across five Aave V3 deployments, potentially flipping once-profitable yield loops into money-losing trades overnight.
Yield Loops Under Pressure
The heart of the issue is a September 9 proposal to raise USDe's base variable borrow rate from 5% to 6% on Aave V3's Core, Plasma, Monad, Mantle, and Avalanche markets. This move, paired with a one-point reduction in Slope1 on each deployment, would drive modeled borrower APRs up by 13 to 89 basis points depending on market utilization. For users who borrow USDe and immediately stake it as sUSDe to capture the spread, the math is shifting fast-and not in their favor.
At the time of the proposal, Aave's Core, Plasma, and Monad markets already showed USDe borrow APRs above the sUSDe supply APY, which stood at 4.72% according to Aavescan's September 10 snapshot. Mantle and Avalanche, despite lower utilization, also posted borrow rates that outpaced staking yields. The result: simple borrow-and-stake loops now deliver negative returns before factoring in incentives, transaction fees, or slippage.
Market Data and Utilization
The impact is not uniform across Aave's USDe markets. Avalanche, with nearly 70% utilization, would see the smallest rate increase-just 13 basis points-thanks to the offsetting effect of the Slope1 adjustment. Mantle, with only 9% utilization, would absorb nearly the full base-rate hike, pushing its modeled borrow APR up by 89 basis points. Across all five markets, the proposal affects roughly $323.8 million in USDe debt against $1.18 billion supplied, according to the figures cited in the proposal.
Borrower rates on Aave are dynamic, shifting as utilization changes. The proposal's modeled APRs reflect a snapshot from September 9, not a fixed cost. This means that as users unwind their leveraged positions or as market conditions shift, the actual borrowing costs could move further-potentially squeezing out remaining loopers or forcing a repricing of sUSDe yields.
Protocol Incentives and Risk Management
LlamaRisk's stated goal is to reduce the prevalence of leveraged sUSDe loops, which have been recycling borrowed USDe into sUSDe staking to capture the yield spread. TokenLogic, which outlined the staged repricing program, argued that a higher borrowing floor would discourage these loops and could eventually lift sUSDe yields for remaining holders toward 5.3%-but only as loop-driven supply unwinds. The proposal is a tactical response to a market structure that has allowed users to extract yield by leveraging Aave's lending mechanics, a pattern that can distort both protocol incentives and risk profiles.
This is not the first time Aave's risk management and protocol controls have come under scrutiny. As reported earlier, governance debates over emergency freeze powers and market interventions have highlighted the delicate balance between user incentives and systemic risk. The current rate hike proposal is another example of how protocol stewards are forced to adapt as user strategies evolve and market conditions shift.
Broader Implications for DeFi Users
For U.S. users and DeFi participants more broadly, the proposed changes underscore the risks of relying on leveraged yield strategies that depend on stable borrowing costs and predictable staking returns. As borrowing rates rise and staking yields fluctuate, the economics of these loops can turn negative with little warning. Users who fail to monitor protocol governance or market utilization may find themselves locked into unprofitable positions, especially if incentives or transaction costs further erode returns.
On September 10, Aavescan data showed sUSDe supply APY at 4.72%, while USDe borrow APRs on Core, Plasma, Monad, Mantle, and Avalanche all exceeded that level. The affected markets collectively held $323.8 million in USDe debt against $1.18 billion supplied, with utilization rates ranging from 9% to nearly 70% depending on the deployment. These figures highlight the scale of capital at risk as protocol parameters shift.
Borrowing and staking loops in DeFi rely on the spread between the cost of leverage and the yield on staked assets. When borrowing costs rise or staking yields fall, these strategies can quickly become unprofitable. Protocols like Aave adjust rates dynamically based on utilization, so users must track both governance proposals and real-time market data to avoid negative carry. Leveraged yield loops can amplify returns in favorable conditions but expose users to rapid losses if market dynamics shift or protocol parameters are repriced.
