Summary
Amid the extreme market turbulence over the past 24 hours, Chaos Labs provides a comprehensive analysis of the impact on Aave V3. Despite the heightened volatility and significant price declines across major crypto assets, Aave’s risk framework and liquidation mechanisms performed robustly, ensuring the protocol remained fully protected and free of new bad debt.
Observations and Analysis
Over the past 24 hours, the crypto market experienced heightened volatility, with BTC declining by 10% and ETH falling over 20%—marking ETH’s lowest price point in more than two years. This sharp downturn triggered widespread liquidations across both lending and perpetual markets, resulting in over $110 million in liquidations on the Aave protocol alone.
Despite the elevated liquidation volume, Aave incurred no bad debt, a testament to its robust risk framework. Liquidations were executed seamlessly, with approximately 80% occurring on the Ethereum Core deployment. Aave’s parameterization and risk management systems functioned as intended, allowing collateralized positions to unwind efficiently while safeguarding the protocol from losses.
Among the collateral assets on the Ethereum Core instance, WETH led with $63 million in liquidations, followed by wstETH at $12 million, WBTC at $8 million, and AAVE at $4 million. Other assets contributed smaller volumes and accounted for a minor share of the overall liquidations.
The chart below highlights the most significant collateral/debt pairings based on liquidation volume, with the number of individual liquidations exceeding $50K indicated above each bar. As anticipated, the majority of these liquidations originated from WETH-backed stablecoin positions, reflecting their high exposure during the market downturn.
Liquidations involving weETH-collateralized stablecoin debt positions were minimal, with weETH exhibiting only minor deviations from its typical exchange rate before quickly reverting to equilibrium. In contrast, wstETH, due to its more prominent role as a collateral asset, experienced a temporary market price deviation of approximately 0.2% from its fundamental value.
Current Market State
With prices still hovering near their recent lows, the protocol remains more leveraged than prior to the market downturn. As of this writing, the majority of deployments are maintaining a lower weighted average health score compared to pre-crash levels, with the Ethereum Core instance reflecting a decrease of approximately 2%. The total Collateral at Risk has temporarily risen by 53%, increasing from $423.56M to $651.69M. Similarly, the number of Wallets at Risk grew by 29%, from 21.33K to 27.61K.
While some markets have yet to fully recover their pre-volatility health scores, none currently pose a significant threat to the protocol’s stability. Chaos Labs’ risk monitoring infrastructure continues to operate in real-time and is fully prepared to intervene within the protocol if necessary.