Aave Sees $200M Weekly Increase in cbBTC Inflows, But There’s a Catch

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

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

cbBTC Increases $200M Weekly on Aave

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

In mid-August, the Aave decentralized autonomous organization (DAO) implemented the Merit incentive program on Base, aiming to reward users contributing to the growth of the Aave ecosystem on the L2.

As Coinbase prepared to launch cbBTC in mid-September, Aave submitted another proposal to onboard the wrapped token using its protocol.

Roughly a month after cbBTC’s launch, an Aave DAO service provider revealed that the protocol housed about 56% of all cbBTC in circulation. The tweet also disclosed 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 (USDT) debt 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 the wrapped token on the protocol has increased by 2,700 BTC worth roughly $200 million, bringing the total cbBTC on the network to 7,500 BTC out of the 11,885 tokens in circulation. This growth has also catapulted cbBTC to the fourth largest asset for borrowing USDC, causing the token to account for 12% of all collateral.

IntoTheBlock explained that this development opened a strategy of “lend cbBTC -> borrow USDC -> lend USDC,” 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 USDC supply whale from the market could make users unable to unwind their trades if they need to repay the loans.