Aave will freeze $279M in osETH, unless StakeWise wins this vote

StakeWise founder Dmitri asked Aave governance on Nov. 11 to vote separately on freezing osETH, the protocol's staking token, challenging a plan to close it to new lending exposure on Aave's V3 Core market.

His forum response challenged a broader collateral overhaul proposed by risk adviser LlamaRisk on Nov. 10. The plan would stop new osETH supply and borrowing against it while leaving existing positions open.

LlamaRisk argues that V3's shared lending pool leaves Wrapped Ethereum (WETH) and stablecoin suppliers exposed to collateral risks at a pooled borrowing rate, while borrowers collect the additional spread from looping strategies that use borrowed funds to build larger staking positions.

Dmitri said StakeWise had experienced no hacks or validator slashings since January 2021 and described immutable, native leverage contracts that return borrowed ETH directly from validators.

A separate vote would let governance weigh that argument against its lending-risk criteria and give StakeWise time to address concerns before reassessment, as Dmitri requested.

LlamaRisk's Nov. 9 analysis put osETH collateral at $279.4 million, backing an estimated $256.6 million of WETH debt. It attributed debt proportionally across each borrower's collateral mix.

The adviser estimated leverage at around 14 times in Aave's ETH-correlated efficiency mode (E-Mode), where osETH had a 93% loan-to-value limit. The 10 largest positions accounted for 66% of the attributed debt, and that concentration makes the treatment of existing positions central to the proposed transition.

Independent daily reserve snapshots show 122,900 osETH deposited on Nov. 9 and 122,400 on Nov. 11. Aavescan's 0.0074-osETH loan balance in both rows measures borrowing of osETH itself, so it does not contradict the much larger WETH debt backed by the token.

The initial freeze would set osETH's E-Mode borrowing limit to zero, while existing borrowers could repay or migrate, with withdrawals subject to their position constraints.

The proposal identifies wstETH, weETH, cbETH and WETH as replacement collateral already available within the same E-Mode, allowing collateral swaps without first repaying all WETH debt.

Aave's migration shifts the cost of risk

LlamaRisk's static analysis found that cutting liquidation thresholds by 2% to 5% would make most collateral in the highly leveraged rsETH and osETH loops eligible for liquidation.

The osETH category also contains other ETH collateral, limiting the ability to target it through a shared threshold.

LlamaRisk instead proposes issuer engagement and natural unwinding, with monthly progress reports. If exposure declines, no further measure would apply.

If migration fails to reduce it, a WETH base-borrow-rate increase would remain a last resort: up to 1%, in 0.5% steps no more than monthly.

Proposed rebates would offset the increase for WETH borrowers holding neither rsETH nor osETH, while an accompanying reserve-factor adjustment would keep the supply rate constant.

Explore the proposed controls

If approved: stop new osETH supply and borrowing against it. Existing positions remain open, with repayment or same-E-Mode collateral swaps available.

The proposed freeze closes new exposure; higher borrowing costs are reserved for stalled migration.

The freeze is proposed and approval-contingent. Existing positions can still face ordinary liquidation risk. Diagrams show selected options and omit transaction costs, execution details and rebate administration. No osETH-specific V4 terms are assumed.

Sources and evidence

Sources

1. LlamaRisk's November 10 proposal, with November 9 position analysis

Supporting facts

• LlamaRisk's November 10 ARFC proposes repositioning Aave V3 Core around established, liquid collateral and moving a broader range of collateral exposure toward V4; its captured next steps make an AIP conditional on approval. [1]
• LlamaRisk's November 9 position analysis estimates $279.4 million of osETH collateral backing $256.6 million of WETH debt on V3 Core, allocating debt pro rata according to each borrower's collateral mix. [1]
• LlamaRisk says osETH positions run at around 14 times leverage, with 93% loan-to-value in the ETH-correlated E-Mode; the ten largest positions account for 66% of the attributed debt. [1]
• Under the proposed initial measures, osETH would be frozen and its E-Mode LTV set to zero, stopping new supply and new borrowing against it while existing positions could remain open, repay, withdraw subject to position constraints, or migrate. [1]
• The proposal says osETH borrowers could swap into wstETH, weETH, cbETH or WETH already available within the existing ETH-correlated E-Mode rather than first repaying all WETH debt. [1]
• If engagement and natural unwinding fail to reduce rsETH and osETH exposure, the proposal reserves a WETH base-borrow-rate increase of up to 100 basis points in 50-basis-point steps, no more than monthly, as a last resort. [1]
• The proposal promises issuer and large-borrower engagement, monthly progress reports and advance forum announcements of follow-up controls; its stated goal is gradual exposure reduction without forced liquidations. [1]

Method

Schematic relationships, not a scale drawing or funds-flow simulation. Monetary figures and approximate leverage are LlamaRisk's November 9 estimates; debt is allocated pro rata by collateral mix. Selectable states show proposed controls and their explicit conditions, not a forecast.

Scope

The freeze is proposed and approval-contingent. Existing positions can still face ordinary liquidation risk. Diagrams show selected options and omit transaction costs, execution details and rebate administration. No osETH-specific V4 terms are assumed.

Infographic by CryptoSlate

Aave V4's lending architecture offers a different way to allocate those costs, although the proposal and V4 overview identify no specific osETH spoke or premium.

Hubs share liquidity, while spokes have local risk settings and limits on how much liquidity they can draw or add. A User Risk Premium charges borrowers according to the collateral needed to cover their debt.

Aave's position-conditions documentation uses a generic example: a 50% premium turns a 5% base rate into 7.5%.

An orderly transition for borrowers depends on both a usable route and acceptable borrowing terms. For lenders, the question is whether governance can reduce exposure while pricing the remaining risk appropriately.

Whether governance grants the separate assessment Dmitri requested, and the migration terms it approves, will determine how that trade-off applies to osETH.