Key findings
- Apparent collateral coverage is different from recoverable value under stress.
- Health measures change with collateral prices, debt value and market parameters.
- Liquidation eligibility does not guarantee timely execution at the assumed price.
Look past loan growth to the liquidation route
Growing borrowing shows use, not recoverability under stress. Price feeds, liquidator capital, market liquidity and network execution must work at the same time.
Aave describes positions with a Health Factor below 1 as eligible for liquidation. The threshold does not guarantee execution price or recovered value. Collateral and borrowed-asset volatility and correlation matter. [1]
| Collateral | Debt | Assumed threshold | HF |
|---|---|---|---|
| 100 | 60 | 80% | 1.33 |
| 80 | 60 | 80% | 1.07 |
| 75 | 60 | 80% | 1.00 |
| 70 | 60 | 80% | 0.93 |
CBK calculation. Debt is fixed; interest and price-feed delays are omitted. Exactly 1.00 is distinguished from below 1.
The speed of a decline versus the speed of liquidation
A gradual decline can leave time to repay or add collateral. A sharp drop can push many positions across the threshold together. Liquidators compare realizable sale prices with execution costs; sufficient marked collateral need not be immediately saleable at that mark.
A slow feed can describe an earlier market, while an excessively sensitive one can react to temporary distortions. Examine source markets, update rules and exception handling together. One accuracy statistic cannot describe every relevant condition.
Treasury-backed tokens still face liquidation questions
A less volatile underlying asset can reduce some risk without removing recipient-eligibility or redemption-time restrictions. A liquidator’s ability to receive and cash out the token matters. Nominal price stability is not the same as operational liquidity. [2]
FSB discussion of liquidity and maturity mismatch applies when quickly payable liabilities depend on assets with slower or restricted exits. Token format does not automatically close that timing gap. [3]
| Shock | Variables to distinguish |
|---|---|
| Price decline | Collateral and debt moving together |
| Liquidity contraction | Executable size and sale price |
| Execution delay | Network, liquidator and feed updates |
| Redemption restriction | Eligibility, hours, limits and suspensions |
Test combined shocks too; do not assume these dimensions are independent.
What TVL and loan balances can miss
Deposit value can rise solely because collateral prices rise. Reuse of the same economic asset across several layers complicates the relationship between gross balances and ultimate risk. An aggregate is not necessarily net capital or independent customer count.
Find the weakest connection: concentrated collateral, liquidators dependent on a narrow route or no alternative during redemption suspension. More collateral names do not necessarily mean diversified risk.
Debt moves as well as collateral
Even with unchanged collateral prices, a borrowed asset’s appreciation or accruing interest can lower HF. Value both sides in the same unit. Calling collateral stable does not establish a stable overall position.
At collateral 100, debt 60 and an 80% threshold, HF is 1.33. A 20% collateral decline combined with a 20% rise in debt value gives 80 × 0.8 ÷ 72, or approximately 0.89. Joint shocks reveal a boundary sooner than isolated sensitivities. A fuller model adds correlations, feeds and execution delays.
| Hypothetical shock | Collateral | Debt | HF |
|---|---|---|---|
| No change | 100 | 60 | 1.33 |
| Collateral −20% | 80 | 60 | 1.07 |
| Debt +20% | 100 | 72 | 1.11 |
| Both shocks | 80 | 72 | 0.89 |
CBK analysis. This is an analytical framework, not observed customer performance or a market benchmark.
Explain the adverse path
A credit description needs more than normal-case returns. State what triggers liquidation, who executes and where any shortfall lands. Technical transparency is inadequate if users cannot understand the adverse scenario.
Well-designed liquidation can reduce exposure quickly when liquidity and execution remain available. Evaluate automation through clear failure procedures rather than a claim that failures cannot occur.
Scope & limitations
No particular Aave market or asset is rated for safety. Thresholds and eligible collateral vary by market and version. Examples illustrate single-collateral sensitivities and are not borrowing recommendations.
CryptoBridge Korea analysis based on public materials. Source facts are distinguished from interpretation and hypothetical calculations. References to organizations or projects do not imply their sponsorship or review of this paper.
Sources & scope
- Aave, Health Factor & Liquidations ↗Liquidation mechanics. Parameters require market- and version-specific review.
- Ondo Finance, OUSG overview ↗Issuer product documentation. Eligibility and redemption limits require the applicable legal terms.
- FSB, The Financial Stability Implications of Tokenisation ↗Analysis of tokenization and financial stability, not a safety certification for any product.