US Stocks Can Be Pledged: The On-Chain Lending Loop Still Needs a Few More Links

Aave has launched a tokenized US stock collateral lending market on Base to address declining market share, but the capital utilization rate remains low.

Written by: Conflux

On September 25, the lending protocol Aave launched Equities Hub on the Base chain, allowing users to deposit tokenized assets of 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 have turned their attention to tokenized stocks almost simultaneously, but the actual lending scale in this new market is still quite small.

Stocks are rapidly moving on-chain, but those looking to borrow against these stocks have not kept pace.

Why Aave is Seeking New Collateral

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

This context underlines Aave's expansion of collateral options. Its founder, Stani Kulechov, believes that the more collateralizable assets there are, the greater the lending opportunities.

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

Demand Has Yet to Be Proven

The supply of tokenized stocks has been increasing rapidly. At the beginning of September, the market capitalization of tokenized stocks was about $3.1 billion, up from less than $1 billion at the beginning of the year.

However, borrowers have not kept up. In the early stages of Aave's Equities Hub, deposits exceeded $8.15 million, with about $435,000 borrowed, resulting in an overall capital utilization rate of only 5.34%. In Morpho's early stages, users collateralized about $104,000 and borrowed about $55,000, with 98.9% of the maximum market liquidity coming from two vaults managed by the DeFi treasury management firm Steakhouse.

The speed of assets moving on-chain is rapid, but whether these assets can create sustained on-chain lending demand has not yet been sufficiently proven by data. These markets have been online for a short time, and the numbers only indicate a small start.

48 Hours of Price Stagnation

Aave connects to the tokenized economic rights of stocks, but the trading time restrictions of traditional stock markets have also entered the chain.

Chainlink updates the quotes for this batch of tokens from 8 PM Eastern Time on Sunday to 8 PM on Friday, maintaining the last published price during weekends and US market holidays, resulting in 48 hours of no updates each week. According to DeFi risk service provider LlamaRisk, Aave's market remains open for deposits, borrowing, and liquidation during weekends.

Two issues need to be separated here:

Price information has gaps. If a significant event occurs with Nvidia on Saturday, there may be a gap when the market opens on Monday, and the collateral value seen by the protocol would still be that of Friday. LlamaRisk noted that news during market closures may manifest as one-time price changes when the price feeds resume.

How Aave handles this gap is another question. LlamaRisk has already incorporated factors such as price gaps and liquidation delays during weekends and holidays into its model when designing initial parameters, setting collateral rates for the seven stocks between 65% and 79%. According to LlamaRisk, USDC suppliers voluntarily enter this market, and the risks do not spread to Aave's other markets. Some media analyses suggest that if price gaps coincide with insufficient token liquidity, bad debts may fall on these suppliers. However, whether these parameters can cover extreme weekend market conditions has not yet been tested in real markets.

When it comes to the liquidation phase, the problem is not over. Liquidation does not simply convert collateral into cash at oracle prices; it requires selling these tokenized stocks in the market. If the trading depth on Base is insufficient, large forced sales may further depress prices, leading to actual transaction prices falling below the prices used by the protocol to calculate collateral rates, thereby amplifying bad debt risks.

This is another constraint currently faced by such markets: assets can go on-chain, but the trading depth on-chain may not keep pace with the collateral scale. Some analyses point out 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, further narrowing the time gap between traditional markets and on-chain markets. NASDAQ's proposal was approved by the US Securities and Exchange Commission (SEC) in April this year. Chainlink also expects to provide 24/7 price feeds for these tokens in the future, which have not yet been launched.

Mirror Lacks a Closed Loop

In December 2020, Terraform Labs, behind Terra, launched the synthetic asset protocol Mirror Protocol, allowing users to mint synthetic assets (mAssets) that track the prices of US stocks like Apple and Tesla on-chain, over-collateralized with UST. These tokens did not have real stocks behind them, only simulating prices.

After the collapse of Terra in May 2022, Mirror's collateral system lost its foundation; in August, Band Protocol stopped providing price data for Terra Classic, forcing the suspension of Mirror's CDP operations, and the protocol ultimately came to a standstill.

Today's structure is different. The tokenized stocks issued by cryptocurrency exchange Coinbase are backed by real stocks held in segregated custody, providing holders with real economic exposure to the stocks, rather than being purely synthetic assets that track stock prices. Mirror's point is not that Aave will repeat the same mistakes, but that if any link in the asset, price, collateral, and liquidation chain is broken, simply mapping US stocks onto the chain will not solve the financial infrastructure problem.

Aave's Own Collateral Lessons

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

The risk of stock tokens is price stagnation, while rsETH had issues with the asset itself; the mechanisms are different. The commonality is that the collateral value recognized by the protocol diverges from the real market value, and the money has already been lent out. Both issues point to the same question: can lending protocols accurately price collateral and clear it?

What Needs to Be Verified is the Entire Closed Loop

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 US stocks also enter the chain.

The question of whether stocks can go on-chain is no longer an issue. What truly needs to be addressed is whether there are people willing to borrow against them, whether there are others willing to provide liquidity, and whether prices can reflect market changes in a timely manner, triggering liquidations that can actually be sold.

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