Summary
Amid the high volatility of the last two days, Chaos Labs provides a recap of the impact of recent market activity on Aave V3. During recent market events, the protocol experienced significant liquidations, primarily on the Ethereum network involving ETH-denominated collateral. All liquidations were executed efficiently thanks to the safe parameterization of the assets, ensuring the protocol remained protected and no bad debt occurred.
Observations and Analysis
Over the past two days, the crypto market experienced extreme volatility, with Bitcoin dropping 10% and Ethereum declining by over 30% since February 2nd. This rapid market movement led to substantial liquidation events across lending and perpetual markets, marking one of the largest liquidation volume days in the past year.
Despite the high liquidation volume, Aave did not accrue bad debt, and the previously existing bad debt decreased by 2.7% due to the decrease in the value of the debt assets.
$210M in liquidations were executed efficiently across the protocol, 79% of which were performed on the Ethereum Core instance. The robust risk management mechanisms within Aave ensured that the collateralized positions were settled as intended, minimizing protocol losses.
Among the collateral assets, in the Ethereum Core instance, WETH accounted for $96M in liquidations, WBTC saw $25M, weETH reached $20M, and wstETH experienced $11M in liquidations, with other assets reporting a lower liquidation volume, respectively.
While high liquidation volumes for WETH and WBTC were expected, given the price movement, the substantial liquidations involving weETH and wstETH might appear unusual. However, upon deeper analysis, these liquidations occurred in uncorrelated positions, primarily those that used WETH as collateral to borrow stablecoins or WBTC. The chart below shows the collateral/debt pairings that had the most significant liquidations, with the number of unique liquidators for that pair indicated above each bar.
The effectiveness of Aave’s parameter settings ensured that these liquidations occurred smoothly, even during high market deviations of LST and LRT assets. weETH and wstETH deviated from their exchange rates by 1.68% and 0.78%, respectively, over the last 24 hours.
Current State of Market
As of this writing, all deployments but Scroll, ZkSync, Gnosis, and Ethereum EtherFi have higher weighted health scores (an average of each user’s health score, weighted by the amount borrowed) than before the market turbulence.
The combination of liquidations and price rebounds has left users on Aave in a relatively less leveraged position. The total Collateral at Risk decreased 47.5% from $544.1M to $287.46M due to a combination of significant liquidations and collateral price drawdowns, with the number of Wallets at Risk decreasing 32% from 19.61K to 13.34K. Of the markets that have not fully recovered to pre-volatility health scores, none present a significant risk to the protocol; these deployments are presented in more detail below.
Scroll
The largest borrow positions on Scroll are users borrowing WETH against weETH, presenting little risk to the protocol.
ZkSync
ZkSync has heavy looping activity; these positions have a low likelihood of liquidation.
Gnosis
The largest borrow position in this market is a user borrowing stablecoins against sDAI collateral; the second largest position is also engaged in this behavior. The majority of the largest borrow positions are between users borrowing correlated assets.
Ethereum EtherFi
A single weETH collateral/FRAX debt position represents an outsized portion of this market, though its health score and size indicate that it does not pose a risk.
Conclusion
Aave’s liquidation mechanism and associated risk parameterization functioned efficiently during this period of heightened market volatility, creating no bad debt even as it processed more than $200M worth of liquidations. The clearing out of leverage has left Aave in a strong position, with no significant new risks as a result of the market event.
Disclaimer
Chaos Labs has not been compensated by any third party for publishing this report.
Copyright
Copyright and related rights waived via CC0