LlamaRisk Proposes $1.33 Billion Aave V3 Collateral Freeze as Protocol Prepares for V4 Migration

LlamaRisk Aave V3 Collateral Proposal Targets $1.33 Billion in Assets

The LlamaRisk Aave V3 collateral proposal could significantly reshape one of decentralized finance's most important lending markets, with approximately $1.33 billion in collateral potentially affected by new borrowing restrictions.

On November 10, 2026, DeFi risk management provider LlamaRisk published a governance proposal recommending that Aave V3 Ethereum Core concentrate on established, highly liquid collateral.

The proposal covers assets including rsETH, osETH, LBTC, tBTC and rETH, along with several smaller reserves.

According to LlamaRisk's November 9 assessment, these positions supported approximately $1.03 billion in outstanding debt.

The proposed restructuring would gradually reduce Aave V3 Core's exposure to complex collateral strategies while encouraging suitable positions to migrate toward Aave V4.

However, the proposal does not call for an immediate liquidation of the affected positions.

Instead, LlamaRisk recommends freezing selected reserves, restricting new borrowing, and working with asset issuers and borrowers to facilitate an orderly transition.

The plan remains subject to Aave governance approval.

It should therefore not be described as an already completed $1.33 billion withdrawal from the protocol.

Why LlamaRisk Wants to Restructure Aave V3 Core

Aave is one of the cryptocurrency industry's largest decentralized lending protocols.

Users can supply supported digital assets to lending pools and borrow other assets against eligible collateral.

Aave V3 Core combines liquidity across multiple supported assets.

This structure allows borrowers to access substantial liquidity without requiring a completely separate lending market for every collateral type.

However, the model also creates shared risks.

When a lending market supports many different collateral assets, problems affecting one asset can potentially influence the wider pool.

LlamaRisk argues that some collateral types introduce additional operational, financial and technical risks that are not adequately reflected in borrowing costs.

The Problem With Complex Collateral

Some digital assets depend on multiple external systems.

For example, liquid restaking tokens may rely on staking infrastructure and additional services.

Wrapped Bitcoin products can depend on custodians, bridges or specialized signing mechanisms.

Other assets may use leveraged strategies or derivatives.

These structures introduce risks beyond ordinary price volatility.

A problem affecting an underlying protocol, bridge or issuer could reduce the reliability of the collateral.

LlamaRisk's proposal seeks to reduce these dependencies within Aave V3 Core.

Its objective is to reserve the main market for assets with relatively established liquidity and more manageable risk characteristics.

Which Assets Are Affected by the Aave V3 Proposal?

The proposal identifies five major collateral assets representing most of the affected exposure.

Aave V3 Core Collateral Breakdown

<text color="secondary" size="sm">Values are based on LlamaRisk's November 9, 2026 assessment. Debt is allocated proportionally across borrowers' collateral holdings.</text>

The five largest assets account for almost all the collateral included in the proposal.

Smaller affected reserves include eBTC, BTC.b, tETH, LDO and a Pendle principal token.

The proposal also addresses mUSD, which is currently a borrowable asset rather than a collateral asset.

rsETH Represents the Largest Affected Position

rsETH is the largest collateral exposure covered by the proposal.

LlamaRisk identified approximately $661.8 million in rsETH collateral supporting $605.7 million in WETH borrowing.

The asset is associated with liquid restaking infrastructure.

Restaking allows staked cryptocurrency to participate in additional security or financial arrangements.

This can create opportunities for additional yield.

However, it can also introduce risks associated with the underlying restaking infrastructure.

rsETH Was Already Frozen

An important detail is that rsETH had already been frozen on Aave V3 Core since April 2026.

Its loan-to-value ratio was already zero.

Therefore, the latest proposal does not introduce a completely new freeze for rsETH.

Instead, it focuses on facilitating the migration of existing positions.

LlamaRisk proposes adding wstETH, weETH and cbETH to the relevant efficiency-mode category.

This could allow borrowers to replace rsETH with other supported collateral without immediately repaying their entire WETH debt.

The approach is intended to reduce the risk of disorderly liquidations.

osETH Faces New Borrowing Restrictions

osETH is another major asset covered by the proposal.

It represents approximately $279.4 million in collateral backing $256.6 million in WETH borrowing.

Unlike rsETH, osETH was not already frozen under the November 9 snapshot.

The proposed changes would freeze the reserve and reduce its borrowing capacity to zero, including within the relevant efficiency-mode category.

Why osETH Requires Careful Management

LlamaRisk reports that osETH positions are highly leveraged.

Some borrowing strategies use approximately 14 times leverage.

These positions involve repeated borrowing and collateral deployment.

Such strategies can amplify returns when market conditions are favorable.

However, they can also become vulnerable to small changes in collateral values, liquidation thresholds or borrowing costs.

LlamaRisk therefore recommends avoiding sudden changes that could force large-scale liquidations.

Instead, borrowers would be encouraged to replace osETH collateral with assets that remain supported on Aave V3 Core.

LBTC, tBTC and rETH Also Face Restrictions

The proposal also covers several Bitcoin-linked and Ethereum staking assets.

LBTC

LBTC represents approximately $177.4 million in collateral supporting $72.1 million in borrowing.

Most of the associated debt consists of stablecoins.

LlamaRisk expects LBTC to remain available through a dedicated Aave V4 lending module.

The proposal would freeze LBTC on V3 Core and encourage borrowers to migrate or repay.

tBTC

tBTC represents approximately $117.4 million in collateral backing $52.9 million in debt.

The asset had already been frozen on V3 Core before the latest proposal.

LlamaRisk therefore does not recommend introducing a new initial freeze for tBTC.

Instead, the proposal provides for additional risk controls if existing exposure does not decline.

rETH

rETH represents approximately $81.8 million in collateral supporting $35.4 million in borrowing.

The proposal would freeze the reserve and set its loan-to-value ratio to zero.

Borrowers could continue managing existing positions, subject to the protocol's collateral requirements.

These assets would not necessarily disappear from the broader Aave ecosystem.

The objective is to reduce their exposure within V3 Core while allowing more suitable arrangements elsewhere.

What Does Freezing Collateral Mean for Aave Users?

The word "freeze" can sound alarming, particularly when billions of dollars are involved.

However, freezing a lending reserve is not the same as confiscating assets or automatically liquidating borrowers.

Under the proposed initial measures, affected reserves would stop accepting new supply.

New borrowing against the affected collateral would also be restricted.

Existing positions could remain open.

Users would generally retain the ability to repay loans, withdraw eligible collateral, or migrate positions, subject to liquidity and collateral requirements.

Loan-to-Value Ratio Explained

Loan-to-value, or LTV, determines how much a user can borrow against eligible collateral.

For example, suppose an asset has an LTV of 70%.

A user depositing $10,000 worth of that asset could theoretically borrow up to $7,000, subject to other protocol restrictions.

If the LTV is reduced to zero, the asset no longer provides capacity for new borrowing.

However, that does not automatically mean an existing loan must be liquidated.

Liquidation eligibility depends on the position's health factor and applicable liquidation threshold.

Why Liquidation Thresholds Matter

The liquidation threshold determines when collateral is considered insufficient to support a loan.

Aave uses a health factor to measure borrowing safety.

When a position's health factor falls below 1, it becomes eligible for liquidation.

Reducing a liquidation threshold can weaken the health factor of an existing position.

That is why LlamaRisk proposes gradual changes rather than immediate reductions.

Why $862 Million in WETH Debt Requires Special Attention

The proposal identifies approximately $862 million in WETH borrowing backed by rsETH and osETH collateral.

These positions are particularly sensitive because many involve leveraged borrowing loops.

LlamaRisk estimates that some strategies use approximately 12–14 times leverage.

At this level, relatively small changes in borrowing conditions can create substantial consequences.

The Risk of Abrupt Liquidation Threshold Changes

According to LlamaRisk, reducing liquidation thresholds by only two to five percentage points could make most of the rsETH and osETH collateral liquidatable.

This creates a difficult challenge.

The protocol wants to reduce exposure to complex collateral.

However, moving too aggressively could destabilize existing positions.

LlamaRisk therefore recommends engaging directly with large borrowers and asset issuers.

The aim is to encourage voluntary migration before considering more restrictive measures.

Borrowing Rate Increases as a Last Resort

If exposure does not decline sufficiently, LlamaRisk proposes a possible increase in WETH borrowing rates.

The maximum proposed adjustment is 100 basis points, implemented in steps of up to 50 basis points.

Higher borrowing costs could make leveraged strategies less profitable.

That might encourage borrowers to unwind their positions voluntarily.

However, the proposal includes safeguards designed to limit the impact on borrowers who do not hold the targeted collateral.

These include potential rebates through Merkl and corresponding reserve-factor adjustments.

Importantly, higher borrowing rates would be considered only as a final measure.

How Aave V4 Could Support More Complex Collateral

A central part of the proposal is the distinction between Aave V3 Core and Aave V4.

LlamaRisk wants V3 Core to concentrate on established, liquid assets.

Aave V4 would provide a more flexible environment for collateral requiring specialized risk controls.

Aave V4's Hub-and-Spoke Architecture

Aave V4 uses a hub-and-spoke model.

Liquidity hubs manage shared liquidity and accounting.

Spokes provide modular lending markets with their own risk settings.

This architecture allows the protocol to separate certain risks while maintaining access to shared liquidity.

For example, a collateral asset with additional bridge or issuer risk could operate through a dedicated spoke.

The spoke could have specific borrowing limits and risk parameters.

Collateral-Specific Risk Premiums

Aave V4 also introduces risk premiums based on collateral quality.

Borrowers using assets with additional risk may face higher borrowing costs.

This allows the protocol to account more directly for differences between collateral types.

Under V3 Core's pooled structure, LlamaRisk argues that suppliers can be exposed to complex collateral without receiving sufficient compensation for the additional risk.

V4 is intended to address that imbalance.

However, moving collateral to V4 does not eliminate the underlying asset's risks.

It changes how those risks can be isolated, limited and priced.

What Assets Would Remain on Aave V3 Core?

The proposed restructuring would preserve a range of established collateral assets.

These include WETH, wstETH, weETH, cbETH, WBTC and cbBTC.

Major stablecoins such as USDC, USDT, DAI and GHO would also remain supported.

Other retained assets include AAVE, LINK and XAUt.

Certain yield-bearing stablecoins, including USDe, sUSDe and syrupUSDT, would remain subject to the applicable risk framework.

The intention is not to eliminate every asset with additional complexity.

Instead, LlamaRisk wants to apply clearer standards for collateral eligibility and operational risk.

Aave's Earlier Security Incidents Provide Important Context

The latest proposal follows a series of security and risk-management developments affecting the Aave ecosystem.

In April 2026, the KelpDAO rsETH bridge exploit created substantial concerns about the risks associated with restaking infrastructure.

The incident involved approximately $292 million in assets and subsequently affected Aave through collateralized borrowing activity.

In June, Aave's risk management contributors proposed a broader framework addressing asset, bridge and blockchain risks.

The latest V3 Core proposal continues that effort.

October 2026: Aave Freezes Hundreds of Reserves

Another important event occurred in late October.

Aave temporarily froze hundreds of reserves after a wallet associated with the Binance exploiter deposited approximately 60 million USDT and borrowed 19,762 WETH.

Bitnxt covered the incident in its report on Aave freezing V3 and V4 reserves after exploiter-linked borrowing.

The earlier freeze was an emergency response to a specific security situation.

The new LlamaRisk proposal is different.

It is a longer-term effort to restructure collateral eligibility and reduce risk within Aave V3 Core.

Both developments nevertheless highlight the challenges of managing shared liquidity across decentralized lending markets.

How Much Revenue Could Aave Lose?

The proposal also carries financial implications for the Aave DAO.

According to LlamaRisk, the affected borrowing positions currently generate approximately $3.7 million in annual DAO revenue.

The estimate is based on average realized borrowing rates over the preceding three months.

Estimated Annual DAO Revenue by Collateral

These figures represent estimated existing revenue.

They are not a forecast of the final financial impact.

Some borrowing activity could migrate to other supported collateral or Aave V4.

New demand could also replace part of the activity being phased out.

Why Aave Might Accept Lower Revenue

LlamaRisk's proposal reflects a trade-off between revenue and risk.

Supporting more collateral assets can increase borrowing activity.

However, it can also introduce additional dependencies and potential losses.

A severe collateral failure could create consequences much larger than the annual revenue generated by the affected positions.

From this perspective, reducing exposure may improve the protocol's long-term resilience.

However, whether the restructuring produces better economic outcomes will depend on the effectiveness of the migration and the development of Aave V4.

Could the Proposal Trigger Mass Liquidations?

The proposal is specifically designed to avoid sudden, large-scale liquidations.

The initial measures would preserve existing positions.

Borrowers would have time to repay, withdraw eligible collateral, or migrate.

LlamaRisk also proposes monitoring how quickly exposure declines.

Additional measures would be introduced only if necessary.

Gradual Liquidation Threshold Reductions

For LBTC, tBTC and rETH, liquidation thresholds could be reduced gradually if exposure remains elevated.

The proposal allows steps of up to two percentage points within the relevant governance limits.

Each adjustment would be sized so that collateral becoming liquidatable remains below $2 million or 5% of the asset's remaining collateral.

This is intended to prevent abrupt changes from triggering substantial liquidations.

However, it does not guarantee that no individual borrower will face liquidation risk.

Users must continue monitoring their health factors and borrowing positions.

How the Proposal Could Affect DeFi Lending Markets

The restructuring could have consequences beyond the affected collateral assets.

Aave is a major source of decentralized borrowing liquidity.

Changes to its collateral requirements can influence how users allocate assets across protocols.

Some borrowers may migrate to Aave V4.

Others may repay loans or move to alternative lending markets.

Asset issuers may also need to work more closely with risk managers to demonstrate that their tokens meet the required standards.

Competition Among DeFi Lending Protocols

The decentralized lending industry includes platforms such as Aave and Morpho.

These protocols use different approaches to managing lending markets and collateral risks.

Bitnxt previously covered Arbitrum's growing stablecoin activity and Morpho lending markets.

That development illustrates how lending infrastructure is expanding across blockchain networks.

However, an increase in borrowing activity does not automatically mean that risk has declined.

As DeFi markets grow, the quality of collateral and the effectiveness of liquidation mechanisms become increasingly important.

Aave's latest proposal reflects that broader challenge.

Bitnxt Take: Aave Is Choosing Risk Discipline Over Maximum Collateral Expansion

At Bitnxt, we believe the LlamaRisk proposal represents an important strategic decision for decentralized finance.

For years, DeFi lending platforms have competed to support more assets, attract liquidity and expand borrowing activity.

However, supporting additional collateral is not always beneficial.

Every new asset introduces dependencies that must be understood and monitored.

Some depend on bridges.

Others rely on custodians, staking systems or complex financial strategies.

These risks can become particularly significant when large amounts of borrowing are supported by highly leveraged positions.

Why the $1.33 Billion Figure Matters

The size of the affected collateral demonstrates that the proposal is not a minor technical adjustment.

Approximately $1.33 billion in collateral supports more than $1 billion in borrowing.

That makes the transition financially significant.

However, the figure should not be interpreted as an immediate withdrawal or loss.

The proposal aims to reduce exposure gradually.

We believe this distinction is important because misleading headlines about billions of dollars being removed from Aave could create unnecessary concern.

Our View on Aave V4

Aave V4's modular architecture may provide a better environment for collateral with additional risks.

Its isolated lending structures and risk premiums could allow the protocol to support a broader range of assets without treating every collateral type identically.

However, technical architecture alone does not guarantee safety.

The effectiveness of V4 will depend on risk parameters, liquidity conditions, monitoring and governance decisions.

The Biggest Challenge: Managing Existing Borrowers

We believe the most difficult part of the proposal will be handling existing leveraged positions.

The rsETH and osETH borrowing loops are particularly sensitive.

Aggressive liquidation threshold reductions could create substantial disruption.

LlamaRisk's decision to prioritize borrower engagement and voluntary migration is therefore significant.

Bitnxt's assessment is that Aave's long-term credibility may benefit more from predictable collateral risk management than from maximizing the number of assets supported by its largest lending market.

The challenge is implementing that strategy without unnecessarily harming existing users.

What Happens Next for the Proposal?

The proposal is currently at the governance stage.

Several steps must occur before the restructuring is fully implemented.

First, the Aave community must review the proposed changes.

The proposal will then need to receive the required governance approval.

Following approval, the initial measures would be submitted through an Aave Improvement Proposal.

LlamaRisk would coordinate with asset issuers and major borrowers to support migration.

The team also plans to provide monthly updates on the reduction of affected exposure.

If positions do not decline sufficiently, additional controls could be considered.

These may include gradual liquidation threshold reductions or, as a final measure, changes to borrowing rates.

Each step would need to follow the applicable governance and execution procedures.

What Should Aave Borrowers Watch?

Borrowers holding affected collateral should monitor the governance process and any approved parameter changes.

The most important indicators include loan-to-value ratios, liquidation thresholds, borrowing rates and position health factors.

Users should also evaluate whether alternative collateral or Aave V4 markets provide suitable migration options.

However, moving a position can involve transaction costs, market risks and different borrowing conditions.

The existence of a proposed migration route does not guarantee that it will be appropriate for every borrower.

Borrowers should avoid assuming that existing positions are permanently protected from liquidation simply because the initial proposal does not call for forced liquidations.

Final Thoughts

LlamaRisk's proposal to restructure Aave V3 Core could affect approximately $1.33 billion in collateral supporting $1.03 billion in outstanding debt.

The plan targets complex collateral assets including rsETH, osETH, LBTC, tBTC and rETH.

Its objective is to concentrate V3 Core on established, liquid collateral while directing more complex assets toward Aave V4.

The proposed transition would begin with reserve freezes and borrowing restrictions, followed by coordination with borrowers and asset issuers.

Additional controls would be considered only if exposure does not decline sufficiently.

The proposal remains subject to governance approval and has not yet been fully implemented.

Bitnxt believes the initiative reflects a broader evolution in DeFi: lending protocols are moving beyond rapid collateral expansion toward more selective risk management, better isolation and clearer pricing of financial risk.

Whether the approach succeeds will depend on the execution of the migration, the response of affected borrowers, and Aave V4's ability to support more complex collateral safely.