Aave Considers Higher Leverage as Bitcoin Loan Liquidation Buffers Narrow

WHY IT MATTERS

In decentralized finance (DeFi), platforms like Aave work like automated pawnshops: you deposit crypto as collateral and borrow against it. If the value of what you deposited drops too much, the system sells your collateral to cover the loan — this is called liquidation. Think of it like a margin call in traditional finance. A "price cushion" is the gap between the current price and the price at which liquidation happens. When that cushion gets thin, even a small price drop can trigger forced selling. If Aave allows higher leverage, borrowers can borrow more relative to their deposit, but their cushion gets even thinner. This matters because large-scale liquidations can create a chain reaction, pushing prices down further and triggering even more liquidations — a dynamic sometimes called a "liquidation cascade."