In June 2022, a hack on the Horizon Bridge resulted in an exploit on Harmony’s ERC Bridge, leading to a total loss of approximately $100,000,000. This hack causing an excessive printing of 1Assets like 1USDC and 1USDT, which subsequently decreased their value and led to a devaluation. Opportunists capitalized on this situation by purchasing the depeg assets at a discounted rate and depositing them into AAVE. Despite the devaluation after the hack, AAVE maintained a 1:1 price ratio for these assets post-hack. This allowed these opportunists to deposit their depeg assets and borrow ONE from AAVE and drained out ONE from AAVE completely.
Problem in AAVE:
At present, 55.19M ONE has been drained off from AAVE V3 Harmony and the market has been brought to a complete freeze. The ONE reserves in AAVE, which were completely borrowed, held a value of about $1.1M at the time of the hack. However, these assets are now worth only $500K.
Remove AAVE bad debt by creating a 10% ($50K) together with AAVE also add 10% ($50K) payment of the fund to remove the debt by allowing AAVE holders to exchange for ONE.
When Harmony was hacked however AAVE didn’t move quick enough to protect their protocol in pricing variable after the hack.
This proposal may not entirely eliminate the bad debt, but it will make a beneficial solution to reduce bad debt and provide compensation to AAVE holders.