Aave Freeze Left Borrowers Paying Up to 36% APR

Aave borrowers in frozen reserves continued accruing interest at annualized rates of 10% to 36% while they were unable to add collateral through fresh deposits. The restrictions followed the Oct. 29 Binance hot-wallet incident, and the affected reserves reopened by Oct. 31. LlamaRisk recommended temporarily lowering borrowing rates, then restoring earlier settings after deposits resumed.

Why it matters

The freeze created opposing pressures for borrowers and suppliers. Existing borrowers still owed interest and could not add collateral to the frozen reserves, while suppliers could request withdrawals if tokens were available. As withdrawals reduced available liquidity, utilization rose, pushing borrowing rates higher even though new borrowing was blocked.

LlamaRisk attributed utilization of 92% to 100% in major stablecoin reserves to supplier withdrawals during the freeze. Aave’s rate formula raises borrowing costs as utilization increases, with a stronger response above a configured threshold. Ordinarily, higher rates can encourage repayment and attract deposits. During the freeze, new deposits were unavailable, leaving repayment as the only one of those two channels for easing pressure.

Market impact

LlamaRisk proposed reducing the upper rate response, known as Slope2, to provide temporary relief. A hypothetical $10,000 loan at a constant 36% APR would accrue about $9.86 in one day, compared with about $2.74 at 10%, before compounding and fees. These figures illustrate the annualized rates; a few hours at 36% would not add 36% to a borrower’s debt.

After fresh supply reopened, LlamaRisk recommended restoring earlier rate settings. Its Oct. 31 comparison modeled rates at each reserve’s observed utilization, holding utilization constant; it did not report realized borrower costs. The results differed by reserve: Core USDC was at its 94% threshold and showed no immediate modeled rate increase, while Base USDC was beyond its threshold and modeled borrowing costs rose more under the restored settings. The episode shows how reserve liquidity, collateral access and borrowing costs can move differently during a market disruption.