Aave sees $200m weekly surge in cbBTC inflows, but there’s a catch

Ethereum-based cryptocurrency lending protocol Aave is witnessing a rapid increase in Coinbase Wrapped Bitcoin (cbBTC) flows to its platform due to a new incentive program involving the asset.

While this reflects the growing liquidity and growing adoption of the Bitcoin product wrapped in Aave, market analytics platform IntoTheBlock says it poses a risk to users. According to a tweet from IntoTheBlock, users may be temporarily unable to repay their loans to Aave if the situation goes sideways.

cbBTC raises $200 million weekly on Aave

Earlier this year, Aave launched Merit, a system designed to reward users who participate in activities on the platform. Some actions that can earn them incentives from the program include holding stkGHO, the staked version of Aave’s dollar-pegged algorithmic stablecoin GHO, and borrowing USD Coin (USDC) from Base, Ethereum’s Layer 2 protocol the crypto exchange Coinbase.

In mid-August, the Aave Decentralized Autonomous Organization (DAO) implemented the Merit on Base incentive program, with the aim of rewarding users who contribute to the growth of the Aave ecosystem in L2.

As Coinbase prepared to launch cbBTC in mid-September, Aave presented another proposal to incorporate the wrapped token through its protocol.

About a month after the launch of cbBTC, a service provider Aave DAO revealed that the protocol hosted about 56% of all cbBTC in circulation. The tweet also revealed that Aave would be launching a new Merit program for cbBTC and users could earn rewards by using the wrapped token as collateral to borrow USDC, migrating Tether debt (USDT) to USDC and switching from BitGo’s Wrapped Bitcoin (WBTC ) to cbBTC.

The catch

Since the Aave DAO launched the cbBTC Merit program on October 24, the amount of token wrapped in the protocol has increased by 2,700 BTC worth approximately $200 million, bringing the total cbBTC to the network at 7,500 BTC of the 11,885 tokens in circulation. This growth has also catapulted cbBTC to the fourth largest asset to borrow USDC, making the token 12% of all collateral.

IntoTheBlock explained that this development opened up a “cbBTC loan -> USDC loan -> USDC loan” strategy, resulting in the share of recursively deposited USDC debt increasing by 2% and even 7% at some point.

This growth, while somewhat remarkable, puts users at risk because the sudden exit of a whale of USDC supply from the market could make it impossible for users to disconnect their trades if they need to repay loans.

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