Aave has frozen new tBTC supply and borrowing on its V3 Ethereum Core market after Threshold paused redemptions of tBTC back into Bitcoin, according to a governance update published by risk provider LlamaRisk. The restrictions took effect on October 31.

Withdrawals remain open but return tBTC rather than native Bitcoin, and the asset's liquidation threshold stays at 78%. With redemptions paused, the token has also lost a key price anchor.

What Still Works on Aave

• New tBTC deposits: OFF
• Borrowing power from tBTC: OFF
• Repaying loans: ON
• Withdrawals, where allowed: ON
• Liquidations: ON

"Allowed" carries weight on the withdrawal line. Under Aave's protocol rules, a withdrawal depends on how much tBTC in the pool is not lent out and on the account remaining adequately collateralized, so an open function does not guarantee that every holder can pull a full balance at once.

Borrowers have also lost one way to protect a position. With new tBTC supply blocked, they cannot top up with more of it; repaying debt or adding other eligible collateral are the remaining options.

Why Withdrawing Is Not Redeeming

tBTC brings Bitcoin exposure to Ethereum and other networks through a bridge that, according to Threshold's documentation, is secured by groups of operators using threshold cryptography. Moving the token between Ethereum addresses and releasing BTC on the Bitcoin network are separate operations, which is why one can stop while the other continues:

• Withdraw from Aave → tBTC lands in the holder's wallet
• Sell tBTC → at whatever price a buyer pays
• Redeem through Threshold → native BTC (paused)

Redemption is the step that needs the bridge itself. According to Alea Research's report on Threshold, it requires cooperation from a supermajority of the bridge's signers, and a separate guardian layer can pause redemptions it considers suspicious. A pause is a designed safety brake. On its own, it says nothing about whether the reserves are there — the same gap between backing and access that applies to other Bitcoin-backed tokens. tBTC is one of several Bitcoin-backed tokens circulating on smart-contract networks, and each depends on its own bridge staying open for holders to move back to native bitcoin.

Zero Borrowing Power, Collateral Value Intact

Aave's guardian multisig executed the freeze transaction at 10:01 UTC on October 31. Its event logs set tBTC's borrowing loan-to-value ratio to zero and left the liquidation threshold at 78%. Acting through the guardian multisig rather than a full governance vote is the fast lane in Aave's permission structure, which lets designated addresses adjust risk parameters without waiting for a community-wide ballot.

The first setting decides how much new debt the collateral can support, and zero means none. The second decides when an existing loan can be liquidated, and leaving it untouched means the freeze itself pushed no position toward liquidation. tBTC still counts at its oracle value for loans already open.

In a hypothetical $100,000 position, the 78% threshold leaves $78,000 of liquidation headroom against $60,000 of debt — a health factor of 1.3, meaning tBTC's oracle price could fall about 23% before liquidation.

That cushion is unchanged by the freeze. It shrinks if the oracle price falls or interest accrues, and the exact figure depends on each account's settings.

The Liquidator's Problem

When a loan does become eligible, an outside liquidator repays part of the debt and takes the collateral plus a bonus. The liquidator then has to turn that tBTC into something useful.

Normally, redemption keeps that simple. Threshold charges a 0.2% redemption fee, according to Alea, so if tBTC traded much below Bitcoin, buying it and redeeming for BTC would pay. That arbitrage tends to hold the token within roughly that range of BTC. With redemption paused, the link is broken. A liquidator can only sell to another buyer or hold the token and wait for redemptions to restart, and either choice now carries the price and timing risk that redemption used to remove. Lenders weigh exactly these exit conditions when they accept tokenized collateral.

Two things would need checking before calling any damage. Whether a market discount reaches Aave's health factors depends on how tBTC's oracle is configured, so a trading gap does not automatically pass through. A precautionary freeze is also not, by itself, evidence of a depeg, a bad liquidation or a loss to Aave; those would show up in prices, liquidation results or unrecovered debt.

Two Reopenings, Not One

LlamaRisk said it will watch Threshold's updates, Aave positions and tBTC's market liquidity before proposing to restore the settings. Threshold resuming redemptions would not reopen Aave automatically. Full recovery would take three visible steps: redemptions running again, BTC payouts completing, and an Aave governance action restoring tBTC's supply and borrowing settings.

The episode shows wrapped-asset risk playing out on two layers, each with its own switch: the bridge that controls conversion back to bitcoin, and the lending market that controls how the token can be used as collateral. Threshold's public status updates and how tBTC trades against BTC are the visible signals to follow, and LlamaRisk's eventual proposal would appear on Aave's governance forum — the same venue where the freeze response was published.

This article is provided for informational purposes only and does not constitute financial or investment advice.