LlamaRisk, Aave’s risk service provider, has proposed reducing the loan-to-value (LTV) ratio of BitGo’s Wrapped Bitcoin (WBTC) to zero on the DeFi lending platform.

However, the Aave community, including Marc Zeller, founder of the Aave Chan Initiative (ACI), is opposed to this move.

Aave Community Debates WBTC Proposal

The proposal highlights concerns stemming from BitGo’s custodial transition for WBTC. In August, BitGo announced its plan to transfer control of WBTC to a joint venture with BIT Global, a partnership that includes Justin Sun, founder of the Tron blockchain. Sun’s involvement has raised transparency concerns.

“Although we continue to be in communication with BitGo to establish clarity about BIT Global’s compliant status, we remain unconvinced about the outlook for this partnership and its implications for WBTC transparency standards and user assurances going forward,” LlamaRisk explained.

LlamaRisk pointed out that its analysis of projects linked to Justin Sun has revealed patterns of transparency issues in products with multi-billion-dollar market caps. Due to these concerns, the firm recommended reducing WBTC’s LTV ratio to zero.

Read more: Wrapped Bitcoin (WBTC): A Beginner’s Guide

Due to these concerns, they recommended reducing WBTC’s LTV ratio to zero. This would prevent further borrowing against WBTC collateral across Aave V3 on Ethereum, Arbitrum, Avalanche, Harmony, Optimism, and Polygon while protecting existing users’ positions.

Additionally, LlamaRisk proposed lowering supply and borrowing caps, keeping them 5-10% higher than current utilization. This would limit WBTC exposure while maintaining user flexibility.

Despite these arguments, many in the Aave community oppose the drastic cut. Marc Zeller criticized the plan as too severe. He suggested introducing alternative Bitcoin products like cbBTC and tBTC to diversify the platform and reduce reliance on WBTC. However, he strongly opposed measures that could harm current WBTC users.

“[We] will not support any scenario hurting them beyond absolute necessity. We are in favor of including diversity (if governance approves it, cbBTC and tBTC will join Aave on Monday) and, if needed, creating incentives to migrate positions by both push and pull factors. The proposed plan is too harsh, and we will not vote for it,” Zeller emphasized.

Read more: Aave (AAVE) Price Prediction 2024/2025/2030

Notably, the Aave community isn’t alone in this debate. Sky, formerly MakerDAO, recently approved a proposal to stop new borrowing against BitGo’s WBTC.

WBTC remains the dominant tokenized version of Bitcoin despite major DeFi players moving away from it. With a market capitalization exceeding $9 billion, WBTC is nearly 50 times larger than Coinbase’s new wrapped Bitcoin product cbBTC.