Chaos Labs Warns Aave of Liquidity Squeeze From Ethena

August 5, 2025, according to DL News, Chaos Labs, the risk advisory firm for Aave, raised concerns on the Aave governance forum regarding the growing risks associated with USDe. As the amount of USDe deposited into the Aave protocol continues to rise, USDe may threaten Aave’s risk resilience, leading to a potential liquidity squeeze.

This issue is significant because USDe, a stablecoin issued by Ethena, has become a key asset in Aave transactions, but Ethena continues to lend out the stablecoins backing this asset, creating substantial risks. Chaos Labs advises Ethena to avoid storing too much stablecoin in Aave, thereby limiting this exposure to maintain the integrity of the redemption mechanism and ensure market stability.

USDe And Its Role In Aave: Risks From Accumulation Process

Chaos Labs reports that currently, Aave has $4.7 billion exposure from USDe and its supported assets like PT and sUSDe, accounting for more than 55% of USDe’s total supply. To understand this better, USDe plays a dual role—both as redemption capital for Aave and liquidity for transactions. This creates a vulnerability in the system when lending contracts and borrowing rates depend on the stability of USDe.

While Ethereum and other stablecoins like USDT have strong support mechanisms, if ETH and USDe are not well-managed, the risks of a liquidity squeeze increase, leading to higher borrowing rates and reducing market liquidity, which could result in DeFi market pressure.

Potential Impact Of USDe Growth On Aave

With the increasing growth of USDe and re-collateralization, the act of buying stablecoins and reinvesting into loans will increase pressure on Aave in the long term. Chaos Labs notes that in a bear market or when investor sentiment shifts, if USDe is lent out without proper adjustments, USDe holders could request redemptions, leading to liquidity squeeze and higher borrowing rates.

However, Chaos Labs suggests that unwinding cycle positions and reducing stablecoin usage during periods of market uncertainty could help mitigate negative impacts, providing short-term stability for Aave.

Conclusion: Caution With Market Fluctuations And Policy Adjustments

Chaos Labs advises investors to closely monitor the development of USDe and ETH within the Aave network, as the rapid growth of stablecoins may increase liquidity risks and asset value fluctuations. It is crucial for DeFi platforms like Aave to have robust risk mitigation measures to ensure stable operations in all market conditions.