Aave Proposes Increased Leverage for Bitcoin Loans Amid Liquidation Risks

Aave governance is advancing a proposal that aims to increase the borrowing power for Bitcoin-backed loans, allowing users to borrow up to $0.81 against each $1 of collateral in Wrapped Bitcoin (WBTC) or collateralized Bitcoin (cbBTC). This is an increase from the current limit of $0.73. However, this change also raises the liquidation threshold from 78% to 85%, which could leave borrowers with less cushion against price fluctuations.

The proposal, put forth by risk service provider LlamaRisk, is currently under consideration, with voting expected to commence shortly. The adjustments would not only apply to the Ethereum Core but also extend to Arbitrum and Base networks, where the loan-to-value (LTV) ratios would be increased by varying amounts.

While the adjustments are designed to enhance capital efficiency based on historical liquidation data, they also pose significant risks. The distance between the maximum LTV and the liquidation threshold would decrease, potentially exposing borrowers to liquidations after smaller price declines. For instance, the collateral-price decline threshold would drop from approximately 6.4% to 4.7% under the new parameters.

This proposal raises critical questions about the balance between enabling greater borrowing capacity and the risks of increased liquidations in volatile market conditions. The outcome of the governance vote will determine whether Aave will implement these changes, which could significantly impact Bitcoin lending dynamics.

New Developments in Bitcoin Lending

• Coinbase has introduced fixed-rate, fixed-term Bitcoin-backed loans through its Morpho Midnight platform, allowing US users to borrow USDC.
• The fixed-rate loans are available to users across the US, excluding New York, and offer stability in interest rates and repayment dates.
• Coinbase's initial BTC-backed USDC loan product was launched on January 16, 2025, and has since accumulated over $1.4 billion in outstanding loans.
• Morpho Midnight's whitepaper was released in May 2026, with the public launch occurring in July 2026.
• Currently, Morpho Midnight holds approximately $30 million in total deposits, which is significantly less than the billions managed by Morpho Blue.
• The introduction of fixed-rate lending aims to provide borrowers with certainty regarding their obligations, making it more akin to traditional credit facilities.
• The partnership with Coinbase is expected to enhance the growth potential of Morpho Midnight, leveraging Coinbase's distribution capabilities.

New Insights on Bitcoin's Market Movement

• Bitcoin has crossed above its 365-day moving average, signaling the end of its bear market.
• The cryptocurrency recently traded at $86,598, with a peak of nearly $87,330.
• This is the first time Bitcoin has reclaimed the 365-day moving average since March 2023.
• Long-term holders appear to have finished selling, allowing new investors to enter the market.
• In August, total U.S. debt surpassed $40 trillion for the first time.
• Bitcoin and precious metals have performed well as a hedge against a weakening dollar.