Aave launched a tokenized US stock collateral lending market on Base to address declining market share, but funding utilization rates are low.

Written by: Conflux

On September 25, the lending protocol Aave launched Equities Hub on the Base chain, allowing users to deposit tokenized assets from seven US stocks including Apple, Nvidia, and Tesla as collateral to borrow USDC.

A week earlier, competitor Morpho also launched a similar market on Base. Both major lending protocols turned their attention to tokenized stocks nearly simultaneously, but the actual borrowing scale in this new market remains quite small.

Stocks are moving to the blockchain rapidly, but those looking to borrow against these stocks have yet to catch up.

Why Aave is looking for new collateral

Since the beginning of this year, Aave's market share in the lending space has dropped from about 59% to 41%, while Morpho's rose from 9% to 19%, and Spark's increased from 5% to 10%. Meanwhile, Aave's market share in the RWA lending sector fell from 62% to 33%, and daily revenue plummeted from approximately $261,000 at the beginning of the year to about $158,000.

This context drives Aave's expansion of collateral options. Aave's founder, Stani Kulechov, believes that the more collateralizable assets available, the greater the borrowing opportunities.

In addition to stocks, on September 16, Aave announced that it will launch an RWA Hub targeting institutions on Avalanche, allowing qualified institutions to use RWA tokens as collateral to borrow Tether's USA₮ in the future.

Demand has yet to be proven

The supply of tokenized stocks has grown rapidly. At the beginning of September, the market capitalization of tokenized stocks was approximately $3.1 billion, compared to less than $1 billion at the start of the year.

However, the number of people borrowing against them has not kept pace. In the early stages of Aave's Equities Hub, deposits exceeded $8.15 million, with approximately $435,000 borrowed, resulting in an overall utilization rate of only 5.34%. In Morpho's early stages, users collateralized about $104,000 and borrowed around $55,000, with 98.9% of liquidity coming from two vaults managed by the DeFi treasury management organization Steakhouse.

Assets are being tokenized quickly, but whether these assets can create sustained on-chain borrowing demand has not yet been sufficiently demonstrated. These markets have been online for a short time, and current figures merely indicate a very small start.

Price freeze for 48 hours

Aave accesses the economic rights of tokenized stocks, but the trading hour restrictions from traditional stock markets are now also affecting the blockchain.

Chainlink updates quotes for these tokens from Sunday night at 8 PM Eastern Time to Friday night at 8 PM, maintaining the last published price during weekends and U.S. market holidays, resulting in 48 hours of no updates each week. However, according to DeFi risk service provider LlamaRisk, the Aave market is still open for deposits, borrowing, and liquidation during the weekends.

There are two things to separate here:

There is a gap in price information. If a significant event occurs with Nvidia on Saturday, there may be a gap at Monday's opening, and the collateral value seen by the protocol would still reflect Friday's price. LlamaRisk mentioned that news during the market closure could manifest as one-off price changes when price feeds resume.

How Aave addresses this gap is another question. LlamaRisk took into account factors such as price gaps and delayed liquidations during weekends and holidays when designing initial parameters, setting collateral rates between 65% and 79% for the seven stocks based on this. According to LlamaRisk, USDC suppliers are voluntarily entering this market, and the risk does not spread to Aave's other markets. Some media analysis suggests that if price gaps combine with inadequate token liquidity, bad debts might fall to these suppliers. However, it remains untested whether these parameters can cover extreme weekend market situations.

When it finally comes to the liquidation phase, the issues are not over. Liquidation does not simply turn collateral into cash at oracle prices; it requires selling these tokenized stocks on the market. If there is insufficient trading depth on Base, large forced sales could further depress prices, leading to actual transaction prices that are lower than the protocol's calculated collateral prices, thereby amplifying bad debt risks.

This presents another constraint faced by such markets: assets can go on-chain, but trading depth on-chain may not keep up with collateral scale. Some analyses indicate that while trading of tokenized stocks on Base is growing rapidly, market depth remains limited.

Nasdaq and NYSE Arca plan to expand trading hours to nearly 23/5 starting December 6, which will further narrow the time discrepancies between traditional and on-chain markets. Nasdaq's proposal was approved by the U.S. Securities and Exchange Commission (SEC) in April this year. Chainlink is also anticipated to provide 24/7 price feeds for these tokens in the future, although this is not yet live.

Mirror lacks a closed loop

In December 2020, Terraform Labs, which backs Terra, launched the synthetic asset protocol Mirror Protocol, allowing users to mint synthetic assets mAssets that track the prices of U.S. stocks like Apple and Tesla on-chain, using UST as collateral. These tokens did not have real stocks behind them, but merely simulated prices.

After the collapse of Terra in May 2022, Mirror's collateral system lost its foundation; by August, Band Protocol stopped providing price data for Terra Classic, forcing the halting of Mirror's CDP operations and eventually leading to the protocol's shutdown.

The structure today is different. The tokenized stocks issued by cryptocurrency exchange Coinbase are backed by actual stocks held in isolated custody, giving holders real economic exposure to the stocks, rather than merely tracking stock prices with synthetic assets. Mirror's point is not that Aave will repeat the same mistakes, but rather that if any one link—assets, prices, collateral, or liquidation—is broken, simply mapping U.S. stocks onto the blockchain does not solve the problems of financial infrastructure.

Aave's own collateral lessons

On April 18 of this year, the cross-chain bridge of Kelp DAO was attacked, resulting in the theft of approximately 116,500 rsETH, which was valued at about $292 million at the time. The incident itself was not caused by Aave, but the attackers deposited about 89,600 rsETH, which had lost its peg, into Aave and borrowed approximately $190 million worth of assets, with bad debt estimated between $123.7 million and $230.1 million. Following the incident, Aave's WETH market utilization rate exceeded 99% for 12.7 consecutive days.

The risk of stock tokens is price freezing, while rsETH represents a problem with the asset itself; the mechanisms are different. The commonality is that the collateral value recognized by the protocol diverges from the actual market value, and the money has already been lent out. Both issues point to a single question: can lending protocols adequately price collateral and effectively liquidate it?

The entire closed loop needs to be validated

Aave needs more quality collateral, so it must bring traditional financial assets into the fold. However, once stocks become collateral, the trading hours, price discovery, and liquidity constraints of U.S. stocks also enter the blockchain.

Whether stocks can go on-chain is no longer the question. The real challenge is another issue: whether people are willing to borrow against it, whether liquidity providers are willing to participate, whether prices can swiftly reflect market changes, and whether assets can truly be sold after liquidation is triggered.

This is the last link that needs to be filled for tokenized stocks to serve as collateral. Moving assets from traditional markets to the blockchain is not difficult; the challenge lies in connecting assets, prices, lending, and liquidation into a complete chain.