Crypto: Aave Tightens USDT Borrowing Rules to Safeguard Liquidity

Aave has just changed the borrowing conditions of USDT on its Ethereum V3 Core crypto market. Since October 21, rates increase faster as soon as 92% of liquidity is borrowed, compared to 94% previously. At a utilization level of 94%, the theoretical rate thus goes from 4.5% to 7%. The decentralized finance protocol aims to preserve more funds available for withdrawals.

Aave Makes Crypto Borrowing in USDT More Expensive

The change took effect on October 21, at Ethereum block 26,241,799. Aave regularly adjusts the parameters of its markets to control risks. In July, the protocol had already considered removing several crypto reserves that had become unprofitable.

This time, the changes directly affect users who borrow USDT. The mechanism remains quite simple. On Aave, the borrowing rate depends on the proportion of deposits already used by borrowers. When liquidity starts to run low, interest rises to discourage new loans and encourage repayments.

The threshold from which this increase becomes particularly rapid falls from 94% to 92%. The other curve parameters remain unchanged. The base rate remains zero, the first slope at 4.5%, and the second at 10%.

At 94% utilization, the old configuration yielded an annual rate of 4.5%. With the new parameters, it reaches 7%. For a steady loan of one million USDT, this 2.5-point gap would represent an additional 25,000 USDT in interest over a full year if rates remained unchanged. Borrowings are not blocked beyond 92%, they simply become more expensive.

57.8 Million USDT of Potential Liquidity

LlamaRisk, responsible for monitoring several risks on Aave, recommended this change after examining the protocol’s crypto reserves. Its analysis covered about 2.89 billion USDT deposited versus 2.48 billion borrowed. The utilization rate was then 85.6%.

With the old 94% threshold, Aave planned to keep about 173.5 million USDT unborrowed when the market reached its optimal level. Switching to 92% raises this theoretical margin to 231.4 million.

That is an additional 57.8 million USDT. However, beware: Aave did not inject this amount into its reserves. It is a margin calculated based on the new parameters. For it to materialize, some borrowers must repay their positions or new depositors must bring funds.

The distinction matters particularly in crypto finance, where withdrawals depend directly on available liquidity.

Aave already knows the consequences of strong withdrawal demand. After the crisis caused by the KelpDAO hack, the protocol recorded 8.45 billion dollars worth of withdrawals in less than 48 hours. The episode fueled discussions about risk management and the resilience of major DeFi protocols.

Crypto Users Are Not Paying 7% Yet

The new curve does not mean that all USDT borrowers now pay 7% interest. This rate corresponds to a hypothetical situation where 94% of liquidity would be used. On October 23, Aave showed about 2.89 billion USDT deposited, 2.50 billion variable debt, and 391.4 million USDT actually available in its Ethereum V3 Core reserve.

The utilization rate was around 86.45%. At this level, the variable borrowing rate reached 4.23%, while liquidity providers earned about 3.29%. Crypto users thus retain conditions relatively close to those seen before the change, as long as utilization remains below the new threshold.

The protocol continues its development in parallel. Its DAO had notably considered a crypto app combining stablecoins, savings, and lending. This expansion requires sufficiently liquid reserves to absorb withdrawal requests, including during periods of high activity. Aave now prefers to raise rates earlier rather than wait until almost all available USDT are borrowed. For lenders and borrowers alike, the 92% threshold thus becomes a new benchmark to monitor.

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