Aave Borrowers Faced Up to 36% APR While a Freeze Blocked Fresh Collateral

Borrowers with positions in Aave's frozen reserves kept accruing interest while the restrictions prevented fresh deposits—including the extra collateral a borrower would normally supply to protect a loan. Suppliers, by contrast, could still request their money back, provided enough tokens were available. That combination meant withdrawals could make borrowing more expensive even though new borrowing was blocked in those reserves.

The freeze left Aave's rate mechanism without its deposit incentive. More expensive borrowing encourages people to repay and offers better returns to anyone willing to lend, but the restrictions prevented that second group from putting money in. Cutting rates could give borrowers some relief while doing nothing by itself to return the tokens suppliers wanted to withdraw.

The restrictions were introduced during the Oct. 29 Binance hot-wallet incident, and the affected reserves had reopened by Oct. 31.

Know When Your Coins Move

LlamaRisk recommended temporarily reducing borrowing rates and then restoring their earlier settings. The episode explains how protecting a lending market can leave its existing users needing different things from the same pool of money.

Why Your Aave Loan Kept Running

Someone using Aave can supply crypto as collateral and borrow another token against it, obtaining funds without selling the original holding. A user who wants dollars while keeping their Ethereum, for example, can borrow a dollar-linked token such as $USDC.

Those borrowed tokens come from other users who supplied them to Aave's lending contracts, the blockchain programs that handle the transactions. Suppliers earn interest while borrowers owe it. The same person can be both a supplier and a borrower with different assets, and supplying $ETH as security for a $USDC loan does not mean that user supplied the $USDC someone else wants to withdraw.

During the Binance hack, a wallet linked to the exploiters had already supplied about $60 million of USDT and borrowed 19,762 WETH, according to LlamaRisk's account. The risk provider described the position as overcollateralized, meaning its collateral exceeded its debt, and said it was subject to normal liquidation. The restrictions were intended to limit further use of Aave during the external compromise.

Freezing the affected reserves stopped new supply and borrowing, while repayments, withdrawals, and liquidations remained enabled. Existing debt therefore continued to accumulate interest, but borrowers could not supply extra collateral into those frozen reserves.

Repayment could still reduce the debt, provided the borrower could obtain the necessary tokens. If you have borrowed $USDC against $ETH, repaying requires $USDC, while adding more $ETH would ordinarily let you support the debt without reducing it. Losing the second option narrows how a position can be managed, especially if the collateral's market price is falling at the same time.

Under Aave's liquidation rules, the health factor divides collateral value, adjusted by its liquidation threshold, by total debt. Below one, the position becomes eligible for liquidation, allowing another participant to repay the debt and receive the collateral plus a bonus. Interest adds to the debt side of that calculation even if the collateral price does not move.

Better Returns Don't Put Tokens in Your Wallet

Suppliers depended on a different balance: how much of the token they wanted was actually available to withdraw. In a simplified pool with 100 $USDC supplied and 90 $USDC borrowed, only 10 $USDC is immediately unborrowed, even if every loan has ample collateral behind it. Collateral supporting those loans does not turn into additional $USDC just because a supplier wants to leave.

If suppliers withdraw five of those available tokens while the debt stays at 90 $USDC, the pool then has 95 $USDC supplied and only five available. The borrowed share has increased from 90% to about 94.7%, despite nobody taking out another loan. This is what utilization measures, and it explains how withdrawals can make a frozen market more expensive for borrowers who have not touched their accounts.

Aave's rate formula charges more as utilization increases, with a stronger response beyond a configured threshold. Its upper section is controlled by a parameter called Slope2. Normally, higher borrowing costs encourage repayment while better supplier returns can attract fresh funds, and both responses can replenish the tokens available for withdrawal. During the freeze, new deposits were prohibited, leaving repayment as the only available channel of the two.

That is why LlamaRisk recommended reducing the upper rate response. Its 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, so a few hours at 36% did not add 36% to anyone's debt.

To put the scale in dollars, 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.

Reducing that bill also reduces the interest available to support supplier returns. Suppliers may prefer more interest, but someone trying to withdraw needs the underlying token, and Aave permits withdrawals only against available liquidity, subject to the account's collateral requirements. Even an attractive quoted yield cannot pay for something outside the protocol until the supplier can retrieve the tokens.

How Reopening Changed the Rate Incentives

Once fresh supply was possible again, a higher rate could once more attract deposits, giving LlamaRisk grounds to recommend restoring the earlier upper slopes on Oct. 31. Its published comparison held each reserve's utilization constant to show what the proposed settings would do, rather than recording what borrowers subsequently paid.

The comparison covered borrowing APR for five Aave V3 $USDC reserves at each reserve's Oct. 31, 2026, 18:05 UTC utilization, contrasting the temporary settings with the proposed restored settings while holding utilization fixed within each reserve. These are LlamaRisk's published modeled rates, not a before-and-after time series or realized interest bills. Values retain source rounding; no interpolation.

Core $USDC was at its 94% threshold, where restoring the upper slope produced no immediate increase in the modeled rate. Base $USDC was beyond its own threshold, so the same kind of intervention produced a much higher modeled cost. The reserve containing billions of dollars could show no immediate rate difference while the smaller reserve became more expensive, because each had different utilization and settings.

CryptoSlate's reopening coverage documented the continuing constraints. Permission to deposit or borrow, the collateral accepted for a loan, and the funds available for withdrawal determine different parts of what a user can do.

Getting more tokens back into a reserve also depends on what people actually do with those permissions. Fresh deposits and repayments add available tokens, while new borrowing and supplier withdrawals consume them.

Borrowers trying to preserve collateral consequently have a reason to want slower debt accrual, while suppliers trying to exit have a reason to want stronger repayment incentives.