Chaos Labs: Aave's $4.7 billion exposure to Ethena may trigger 'liquidity tightening'

According to BlockBeats news on August 5, DL News reported that Aave's risk advisor Chaos Labs stated that as the deposit amount of the USDe stablecoin, pegged to the dollar, continues to increase in the protocol, Ethena's USDe stablecoin may threaten Aave's robustness and trigger liquidity tightening. In a post released on Saturday in the Aave governance forum, Chaos Labs discussed the potential risks of Aave's increasing exposure to Ethena. Chaos Labs noted that when USDe holders deposit significant amounts of the token into Aave while its issuer, Ethena, simultaneously lends out the stablecoin supporting that asset, this creates a significant risk. Ethena must avoid overexposing its stablecoin reserves in Aave. Self-restraining such exposures helps ensure the reliability of redemptions and market stability. Ethena has not yet responded to requests for comment.

Ethena has deposited $580 million of USDe-backed assets into Aave, a strategy known as re-collateralization. Additionally, Aave's current $4.7 billion exposure comes from USDe-backed assets, including PT and sUSDe, accounting for over 55% of the total USDe supply. Chaos Labs stated: 'The dual role of the supporting assets, serving as both Aave's redemption capital and liquidity, creates a vulnerability that could amplify the pressures on both protocols during deleveraging events.' USDe has growth and contraction cycles due to its support mechanism. When the market is bearish, if the supporting assets are borrowed out, the redemption of USDe holders may trigger issues, and its cyclical strategy further amplifies the risks, potentially leading to Aave's liquidity tightening, rising borrowing rates, and a chain reaction. However, there are currently no immediate concerns; the unwinding of positions during contraction periods may offset the surge in utilization. But as USDe grows or re-collateralization increases, the situation may change. Chaos Labs is developing new risk prediction tools to adjust interest rates to ensure orderly redemptions during periods of market stress.