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Ethereum-based cryptocurrency lending protocol Aave is experiencing a rapid influx of Coinbase Wrapped Bitcoin (cbBTC) due to a new incentives program. While this signals growing liquidity and adoption of wrapped Bitcoin on Aave, market analytics firm IntoTheBlock warns it could pose risks to users.
Since launching the cbBTC Merit rewards program on October 24, Aave has seen cbBTC holdings increase by 2,700 BTC, worth roughly $200 million. This brings total cbBTC on Aave to 7,500 BTC out of 11,885 tokens in circulation, making it the fourth largest asset for borrowing USDC and accounting for 12% of all collateral on the platform.
However, IntoTheBlock cautions that this growth enables a “lend cbBTC -> borrow USDC -> lend USDC” strategy, resulting in recursively deposited USDC debt increasing by 2-7%. A sudden exit by a large USDC supplier could leave borrowers unable to repay loans.
The Merit program rewards users for activities like holding staked GHO (Aave’s stablecoin), borrowing USDC on Coinbase’s Base layer-2, and using cbBTC as collateral. Aave integrated cbBTC shortly after its September launch by Coinbase.
While the incentives have successfully attracted cbBTC liquidity, rapidly growing recursive borrowing poses potential insolvency risks if market conditions change suddenly. Aave and its users should monitor the situation closely.