Ethereum Under Stress: Aave Borrowing Spike Raises Risk
Key Takeaways
• wETH borrowing rates surge: Aave platform utilization has increased from 86% to 95% since July 8, driving borrowing costs higher
• Leveraged strategies struggling: “Looping” strategies are no longer profitable due to rising borrowing costs, with over 90% of loans using variable rates
• Short-term unwinding risk: Technical indicators show ETH is overbought, combined with quiet summer conditions that could create selling pressure
• Positive long-term outlook: Q4 is typically the strongest quarter for ETH with average returns of 22.59% since 2013
Ethereum may enter a turbulent period as surging borrowing costs and overbought signals raise red flags, analysts warn. Markus Thielen, head of research at 10x Research, stated: “We believe Ethereum will be vulnerable in the coming period.”
“The market is entering a quieter summer phase — especially in the US during August — while technical indicators remain deeply overbought.”
WETH becomes “less attractive” amid surging funding rates
Thielen explained that a significant risk to Ether’s price is diminishing profit opportunities when borrowing Wrapped Ether (wETH) — the tokenized version of ETH widely used on decentralized finance (DeFi) platforms.
At $3,600, ETH has surged 49% in the past 30 days — outperforming BTC by 34%, based on ETH/BTC ratio. The asset’s relative strength compared to Bitcoin has increased by 34% over the same period, according to the ETH/BTC ratio.
According to Thielen’s market report, Aave lending platform utilization has increased from 86% to 95% since July 8, as borrowing demand far exceeds available supply in the lending pool.
Thielen explained: “Variable costs when borrowing wETH have increased and borrowing ETH at this time is no longer profitable, therefore, those who have borrowed ETH on Aave should liquidate more.”
He added: “If this situation continues, it could cause meaningful unwinding, especially when funding rates and positioning remain stressed.”
Thielen optimistic about Ether’s long-term prospects
Thielen explained that much of this borrowing demand comes from traders using leverage in staking strategies to increase returns. However, he added that the current market environment has reduced the profitability of these trades:
“These so-called ‘looping’ strategies are only profitable when ETH borrowing rates are low and the stETH-ETH peg remains stable.”
Thielen noted that over 90% of Ether loans use variable interest rates, leaving borrowers exposed to sudden increases in borrowing costs.
He said when those variable rates rise as they have recently, it can “cause ripple effects across the entire Ethereum ecosystem.”
Despite potential short-term difficulties, Thielen still expects Ether to perform more favorably after September.
According to historical data, Q3 is the second-worst performing quarter for Ether, with average returns of 8.19% since 2013, while Q4 is typically the strongest quarter, with average returns of 22.59%.
