Ethereum-based cryptocurrency lending protocol Aave is experiencing a significant surge in Coinbase Wrapped Bitcoin (cbBTC) inflows due to a new incentives program. While this reflects growing liquidity and adoption of the wrapped Bitcoin product on Aave, market analytics platform IntoTheBlock warns that it could pose risks to users, potentially making them temporarily unable to repay their loans if the situation takes a turn for the worse.
In mid-August, the Aave decentralized autonomous organization (DAO) implemented the Merit incentive program on Coinbase’s Ethereum-based layer-2 protocol, Base, to reward users contributing to the growth of the Aave ecosystem on the L2. Shortly after, Aave submitted another proposal to onboard cbBTC using its protocol.
Since the launch of the cbBTC Merit program on October 24, the amount of the wrapped token on Aave has increased by 2,700 BTC, worth roughly $200 million, bringing the total cbBTC on the network to 7,500 BTC out of the 11,885 tokens in circulation. This growth has also made cbBTC the fourth largest asset for borrowing USDC, causing the token to account for 12% of all collateral.
However, IntoTheBlock explains that this development opens up a strategy of “lend cbBTC -> borrow USDC -> lend USDC,” resulting in the share of recursively deposited USDC debt increasing by 2% and even 7% at some point. This growth puts users at risk because the sudden exit of a USDC supply whale from the market could make users unable to unwind their trades if they need to repay the loans.