Chaos Labs: Aave's $4.7B Exposure to Ethena Could Trigger "Liquidity Crunch"

On August 5th, as reported by DL News, Chaos Labs, Aave's risk advisor, stated that with the continuous increase in the deposit amount of the US dollar-pegged token USDe in the protocol, Ethena's USDe stablecoin may pose a threat to Aave's robustness and trigger a liquidity crunch. In a post released on Saturday on the Aave governance forum, Chaos Labs discussed the potential risks of Aave's exposure to Ethena, which has been on the rise. Chaos Labs pointed out that when USDe holders deposit a large amount of the token into Aave and its issuer Ethena simultaneously lends out the stablecoin backing that asset, a significant risk is formed. Ethena must avoid overallocating its stablecoin reserves to Aave. Self-imposed limits on such exposure help ensure redemption reliability and market stability. Ethena has not responded immediately to a request for comment. Ethena has deposited $580 million of USDe-backed assets into Aave through a strategy known as rehypothecation. In addition, Aave's current $4.7 billion exposure comes from USDe-backed assets, including PT and sUSDe, accounting for more than 55% of USDe's total supply. Chaos Labs stated: "The dual role of backed assets, serving as both Aave's redemption capital and liquidity, has created a vulnerability that could exacerbate pressure on both protocols during a deleveraging event." Due to the growth and contraction cycles of the support mechanism, in a bearish market, if the backed assets are borrowed, USDe holders' redemptions may pose problems, and the circular strategy amplifies the risk, potentially leading to Aave's liquidity crunch, rising borrowing rates, and triggering a chain reaction. However, there is currently no immediate cause for concern as the unwinding of contraction cycle positions may offset the surge in utilization. But as USDe grows or rehypothecation increases, the situation may change. Chaos Labs is developing a new risk prediction tool to adjust rates to ensure orderly redemptions during periods of market stress.