Aave is weighing a plan to let users borrow more against Bitcoin collateral, but with less room before liquidation. The move could boost capital efficiency, but also makes loans more likely to be wiped out if Bitcoin's price drops fast.
Borrowers who use Bitcoin as collateral on Aave could soon have less room for error if a new governance proposal goes through. The plan, put forward by risk firm LlamaRisk, would let users borrow up to $0.81 for every $1 of WBTC or cbBTC they post. Right now, the limit is $0.73. But the safety margin before forced liquidation would shrink, so even a small drop in Bitcoin's price could wipe out a position.
Leverage up, cushion down
Aave's Ethereum Core pool has historically processed 2,621 BTC liquidations totaling $358 million, with most liquidations completed within just five minutes during major stress events.
The proposal would raise the maximum loan-to-value (LTV) ratio for Bitcoin-backed loans on Aave V3 Ethereum Core from 73% to 81%. At the same time, the liquidation threshold would go up from 78% to 85%. This means users could borrow more, but the gap between the borrowing cap and the liquidation trigger would drop from five points to just four. In practice, a maxed-out Bitcoin loan could be liquidated after only a 4.7% price drop, compared to about 6.4% under current rules.
The changes would not stop at Ethereum Core. The plan also targets Arbitrum WBTC and Base cbBTC, raising their LTVs by five and eight points, respectively. Liquidation thresholds for some assets would also rise, and the liquidation bonus for Base cbBTC would fall from 7.5% to 6%. Existing borrowers would not see their debt go up automatically, but new or adjusted positions could take on more risk. The ARFC proposal, published September 16, 2026, covers Ethereum Core, Arbitrum, and Base. Aave V4's Ethereum Main Spoke is also looking at separate collateral factors for WBTC and cbBTC, showing this is a protocol-wide push as independently reported.
Data-driven risk assessment
LlamaRisk backs the change with a year of liquidation data. Most big positions were liquidated within minutes under current settings. Their review of Ethereum Core found 2,621 BTC liquidations worth $358 million, with a value-weighted 99th-percentile liquidation window of five minutes. In two major stress periods-February and October 2025-all seized volume cleared within five minutes after the price feed update that made liquidation profitable. In October, $0.39 million in bad debt came from $128 million in liquidations, but none of that was tied to the ETH- or BTC-backed collateral under review.
The risk model uses past price swings to set a ceiling for the liquidation threshold. For Bitcoin, the 99.9th-percentile one-hour drop was about 5%, but the worst one-hour fall was more than twice that. The proposal keeps the new Bitcoin liquidation threshold below the model's ceiling to account for market depth, reserve caps, and concentration risks that past data might miss.
Aave's risk parameters, such as LTV and liquidation threshold, are critical for balancing capital efficiency and protocol safety. LTV determines how much can be borrowed against collateral, while the liquidation threshold marks the point at which collateral becomes eligible for liquidation-a distinction that directly impacts leverage and the buffer before forced sales.
Efficiency versus risk
Supporters say higher LTVs could help users get more out of their Bitcoin without raising protocol risk right away-at least in normal markets. But the trade-off is clear. The margin for error gets smaller. A sudden price drop, or a delay in price feeds or liquidator action, could leave borrowers open to fast liquidation and possible bad debt.
It's hard to pin down the total impact on Aave's risk. The proposal does not give a full breakdown of current collateral, debt, or account health. Without this, it's tough to say how much extra risk the protocol would take on if the new rules pass. The governance process is still running. A Snapshot vote is coming, but there is no set timeline for rollout.
Governance and precedent
The debate over Aave's risk settings is similar to what happened with Ethereum's recent look at faster block times, which reported earlier raised worries about validator pressure and network decentralization. In both cases, the push for more efficiency brings higher operational and systemic risks that may not show up in past data.
For now, the 81% LTV for Bitcoin collateral is just a proposal. The final call will depend on Aave's governance process and whether the community trusts past liquidation data to guide future risk, especially with unpredictable market shocks.
LlamaRisk's analysis shows that from August 2025 to August 2026, Ethereum Core saw 7,206 ETH liquidations worth $618 million and 2,621 BTC liquidations worth $358 million. The 99th-percentile time for a liquidation call to clear was five minutes. During the two big stress windows, all seized volume was processed within that time. October's event led to $0.39 million in bad debt, but none came from the ETH- or BTC-backed collateral under review.
Liquidation risk in DeFi lending like Aave depends on market swings, oracle reliability, and how fast liquidators act. When LTVs go up and the gap to liquidation shrinks, even small price moves can trigger forced sales, especially if price feeds lag or market depth dries up. Past data can help build risk models, but it can't guarantee what will happen next-especially in rare, extreme events. Users thinking about higher leverage should weigh the chance for more capital efficiency against the real risk of fast liquidation and loss, especially in wild or thin markets.
