The US stock market closure triggers a periodic price feed freeze, concealing clearing and liquidity risks.

Written by: Liam 'Akiba' Wright

Translated by: Saoirse, Foresight News

Since September 25, Aave's Base market has allowed seven types of Coinbase stock tokens to be used as collateral for USDC loans, and stablecoin lenders participating in this pool will bear the risks brought by weekend price gaps. Aave Labs stated on September 25 that after the temporary restrictions were lifted, its V4 equity center was officially put into operation. The Mag-7 lending branch has set a borrowing limit of 21 million USDC, which is the cap on borrowing capacity, not the current amount already lent.

The Aave lending system remains open, but the oracle prices for stock collateral will lock the price from Friday until Sunday night. During the weekend, borrowers can still trade tokens, but if their positions deteriorate due to a decline in stock prices, the protocol can only recognize this situation once the oracle resumes pricing. If, after the oracle reprices, the liquidator cannot recover sufficient assets from the seized tokens, this optional USDC lending pool could generate bad debts.

Data sources are closed, but the market can still trade

AAPLc, AMZNc, GOOGLc, METAc, MSFTc, NVDAc, TSLAc can only be used as collateral; borrowers can only borrow USDC from this exclusive capital pool. The risk service provider LlamaRisk is responsible for drafting the initial parameters for this market and states that USDC lenders are voluntarily bearing this kind of equity exposure, and the risk will not transmit to other markets of Aave.

The Chainlink equity oracle combines the underlying stock price with the multiplier issued by Coinbase. LlamaRisk sets the operation hours of the oracle from Sunday 8:00 PM to Friday 8:00 PM Eastern Time. From Friday night to Sunday night, as well as during US market holidays, the oracle will maintain the last quoted price and will no longer push new prices. However, the Aave market itself remains open for deposits, borrowing, and liquidation operations, and stock tokens can also be traded on-chain.

Therefore, during the oracle's price freeze period, the health indicators calculated based on collateral positions cannot reflect the latest market information. Even if the oracle's pricing is frozen, the interest generated from USDC loans may still push positions to the liquidation threshold. If the price of the underlying stock declines, making a position unsafe, that position will only become liquidatable after the oracle resumes pricing on Sunday night and updates the price in one go. After that, the liquidator will need to hold the seized collateral exposure until the US stock market enters deep trading hours on Monday.

The initial ARFC proposal (Aave Request for Comment) planned a different approval process. Aave Labs stated before execution that this market activation would rely on the Snapshot voting results as binding, allowing the protocol security committee to directly lift the pause status of the deployed market without going through an AIP or Aave V3 governance vote. Subsequent confirmation indicates that the committee has completed this action. Independent risk manager configuration still requires approval through an AIP proposal.

The Mag-7 branch sets a borrowing cap of 21 million USD, while the USDC deposit cap is 32 million USD. The deposit cap limits the total amount of USDC that can be deposited into this sub-pool; these figures do not represent the current deposits, borrowings, or capital utilization rates. The collateral coefficients for the seven types of stock tokens range from 65% to 79%. LlamaRisk states that in Aave V4, this collateral coefficient simultaneously determines the borrowing limits and liquidation thresholds for each token.

These safety buffers are used to cover price declines that trigger liquidation until the liquidator completes the closure. LlamaRisk’s stress testing method references historical volatility in the US after-hours market, allowing for a 0.5% deviation between the oracle quotes and the real market; during the longest market closure period, debts are calculated according to a 24% annualized USDC borrowing interest rate curve. The model assumes that liquidation will be completed within 5 minutes after the next regular opening of the US stock market. The collateral coefficients for each underlying asset are derived from their historical maximum declines and tail risk statistics.

This set of parameters is merely a model of the allowable loss under the protocol design objectives, not guaranteeing that risks will not occur during the next market closure period. LlamaRisk points out that historical data cannot cover extreme declines that have never been seen before. A maximum liquidation reward of 5.5% is used to compensate liquidators for the costs incurred from selling, redeeming, or hedging the tokens after repaying the USDC debt. Whether this incentive is sufficient depends on the market price at the time of liquidation and the executable liquidity.

This chart visually demonstrates the unique risks of Aave's equity token lending pool: weekend oracle freeze, with a one-time price reassessment on Monday (Sunday night Eastern Time); a significant gap combined with insufficient token liquidity may trigger liquidations and generate bad debts.

The disposal path determines the party bearing the gap loss

Liquidators receiving the seized B20 tokens cannot automatically redeem the underlying stocks. The technical assessment report from LlamaRisk indicates that early secondary market buyers obtaining the tokens constitute unattributed positions, which need to complete the attribution process controlled by the issuer in order to execute redemption. Liquidators not qualified for redemption can sell the tokens on the Base chain, seek counterparties qualified for redemption, or wait to use hedging tools during the closure period. The perpetual futures hedging solution mentioned in the risk assessment is just a hypothetical model and cannot guarantee sufficient hedging capacity for each liquidation.

The secondary market's order book has weak depth, and substantial forced sell-offs will bring significant shocks. LlamaRisk cites data from September 17, before the market launch: a sell-off size causing a 2% price impact is approximately $270,000 to $1,080,000 for a single token. This data is merely a historical snapshot, and does not represent the actual sell-off size at the time of liquidation on September 27. Disposal of larger collateral may require splitting orders or transferring to counterparties with redemption rights.

If the liquidation of the seized tokens allows for the full repayment of the USDC debt and recovery of total value, the capital pool will not show a gap. However, if the opening price gap exceeds the model buffer, or the seized tokens cannot be sold or hedged at preset prices and speeds, the equity capital pool may incur bad debts. The USDC lenders of this pool bear that part of the funding gap; the risk documentation describes only scenario simulations, not actual losses that have occurred. The limit caps restrict the maximum borrowing size of the market, while the real-time risk level depends on the outstanding loans, position sizes, and liquidity at the moment of oracle updates.