Bitcoin (Via Wbtc) As Collateral In Overcollateralized Defi Lending On Aave: Risk Metrics, Liquidation Dynamics, And A Maqasid Al-Shariah Evaluation

Abstract

This study examines the use of Bitcoin exposure, represented by Wrapped Bitcoin (WBTC), as collateral in overcollateralized borrowing on the Aave decentralized finance (DeFi) lending protocol. Using qualitative document analysis of protocol documentation, governance materials, and risk-parameter methodologies, the paper (i) maps Aave’s collateralized-debt mechanics, (ii) reconstructs the core risk metrics that govern leverage and liquidation (loan-to-value, liquidation threshold, and health factor), and (iii) evaluates the arrangement through a Maqasid al-Shariah and fiqh mu‘amalah lens. A scenario-based calculation illustrates how a borrower posting 1 WBTC faces rapid liquidation risk under plausible price declines, even when the position initially respects the maximum LTV. At the system level, explicit parameters, transparency, and overcollateralization can be interpreted as protective features for pool solvency and collective wealth. However, at the individual level the combination of interest-bearing debt, high volatility, automatic liquidation, and liquidation incentives can concentrate risk on borrowers, raising substantive concerns related to riba-like returns, severe gharar from uncertain total obligations, maysir-like behavior in leveraged speculation, and distributive justice. The paper concludes that Aave’s WBTC-collateralized borrowing achieves wealth protection only partially and tends to privilege structurally stronger parties, while proposing maqasid-oriented design directions for more risk-sharing and ethically aligned DeFi models.