🟡 Aave leads DeFi with 51.5% and strong liquidity, but high leverage and limited cushion increase risks in extreme shocks. Dominance brings strength and fragility.

Aave has established a strong presence in the DeFi lending market, capturing 51.5% of the sector. According to NS3.AI, this dominance has created a concentrated liquidity hub that drives systemic feedback loops. The protocol operates with significant leverage, evidenced by a borrowed-to-total value locked (TVL) ratio of 71%. It relies on a relatively modest $460 million backstop to absorb potential losses.

Despite successfully managing recent liquidation stress, Aave's system remains vulnerable to tail risks. These include correlated asset shocks, liquidity challenges, and the possibility of rapid deleveraging that could exceed current safeguards. As the DeFi landscape continues to evolve, Aave's position and strategies will be crucial in navigating these potential risks.