Ethereum-based lending protocol Aave has seen a significant increase in Coinbase Wrapped Bitcoin (cbBTC) inflows due to a new incentives program. While this reflects growing liquidity and adoption of cbBTC on Aave, market analytics platform IntoTheBlock warns that it could pose risks to users.
In mid-August, the Aave decentralized autonomous organization (DAO) implemented the Merit incentive program on Coinbase’s Ethereum-based layer-2 protocol, Base. The program rewards users for activities such as holding stkGHO (the staked version of Aave’s stablecoin GHO) and borrowing USD Coin (USDC) on Base.
After Coinbase launched cbBTC in mid-September, Aave submitted a proposal to onboard the wrapped token. A month after cbBTC’s launch, Aave revealed that the protocol housed about 56% of all cbBTC in circulation. Aave also announced a new Merit program for cbBTC, offering rewards for using the wrapped token as collateral to borrow USDC, migrating Tether (USDT) debt to USDC, and switching from BitGo’s Wrapped Bitcoin (WBTC) to cbBTC.
Since the cbBTC Merit program launched on October 24, the amount of the wrapped token on Aave has increased by 2,700 BTC (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 made cbBTC the fourth largest asset for borrowing USDC, accounting for 12% of all collateral.
However, IntoTheBlock warns that this rapid growth puts users at risk. The strategy of “lend cbBTC -> borrow USDC -> lend USDC” has resulted in the share of recursively deposited USDC debt increasing by 2% to 7%. If a USDC supply whale were to suddenly exit the market, users might be unable to unwind their trades if they need to repay their loans.
*Rewritten for clarity and SEO. Links removed.*