Aave borrowers in frozen reserves kept paying interest while the freeze blocked fresh deposits, including extra collateral. LlamaRisk attributed utilization of 92% to 100% in major stablecoin reserves to supplier withdrawals, with annual borrowing rates of 10% to 36%, and recommended temporary rate relief, then a return to earlier settings after reopening.
Borrowers in Aave's frozen reserves kept paying interest while the restrictions prevented fresh deposits, including the extra collateral they might normally supply to protect a loan. The restrictions were introduced during the Oct. 29 Binance hot-wallet incident, and the affected reserves had reopened by Oct. 31.
Borrowers could repay but not add collateral
Freezing the affected reserves stopped new supply and borrowing while repayments, withdrawals, and liquidations were still enabled. Therefore, existing debt continued to accumulate interest, but borrowers couldn't supply extra collateral into those frozen reserves.
Repayment could still reduce the debt, provided the borrower could obtain the necessary tokens. Losing the option to add collateral narrowed how borrowers could manage a position, especially if the collateral's market price was falling at the same time.
Withdrawals pushed borrowing rates higher
Suppliers were still able to request their money back, provided enough tokens were available. In a simplified pool with 100 USDC supplied and 90 USDC borrowed, five USDC of withdrawals lifts the borrowed share from 90% to about 94.7%, even though nobody took out another loan.
Aave's rate formula charges more as utilization increases. Normally, higher borrowing costs encourage repayment while better supplier returns attract fresh funds. During the freeze, however, new deposits were prohibited, leaving repayment as the available channel of those two responses.
LlamaRisk's rationale attributed utilization of 92% to 100% in major stablecoin reserves to supplier withdrawals during the freeze, with annual borrowing rates of 10% to 36% under the settings then in place. Those were annualized rates: a hypothetical $10,000 loan at a constant 36% annual percentage rate would accrue roughly $9.86 in one day, versus about $2.74 at 10%, ignoring compounding and fees.
Reopening brought back the upper rate slopes
Once fresh supply was possible again, a higher rate could attract deposits, giving LlamaRisk a reason to recommend restoring the earlier upper slopes on Oct. 31. Its published comparison held each reserve's utilization constant, so it shows modeled rates rather than what borrowers subsequently paid.
The modeled effect varied by reserve. Base USDC rose from 7.69% to 10.35% and Avalanche from 8.75% to 12.24%, while Core USDC, at its 94% threshold, showed no immediate increase.
Source: CryptoSlate
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