Overview
Recent oracle behavior and a deteriorating secondary-market structure warrant reducing protocol reliance on crvUSD as a borrowable asset within Aave Ethereum Instance. The objective is to prevent users from expanding leverage during downward oracle deviations and to reduce exposure in a market that is increasingly exhibiting weak peg dynamics and declining usage. As crvUSD is not active as collateral in the relevant configuration, the primary risk surface is not liquidation shortfall driven by impaired collateral exits, but rather the ability for borrowers to increase outstanding crvUSD debt when the oracle marks the liability below par.
crvUSD
Motivation
Over the last 24 hours, the crvUSD/USD oracle price printed a deviation reaching a low of 0.976$. While a 2.4% deviation does not, by itself, represent a meaningful insolvency risk to the protocol, it is consistent with a market in which peg-enforcing mechanisms are becoming less effective, and demand for the asset is weakening. crvUSD’s peg weakness can be interpreted as driven by intrinsic supply/demand conditions. In such regimes, the protocol’s most conservative posture is to prevent users from increasing exposure during periods where the liability is being marked down.
Because crvUSD is a borrow asset, a downward move in its oracle price reduces the marked value of outstanding crvUSD debt, improving borrower health factors and expanding headroom to draw additional debt. This is an adverse dynamic for protocol risk management: it enables incremental leverage precisely when the asset is exhibiting weakening peg behavior, and it allows debt growth to occur under a potentially non-fundamental oracle mark that may not be consistent over longer horizons.
Current Exposure Overview
Market activity has been steadily compressing over time. Both total supply and total borrow have exhibited a persistent downtrend, with current levels near 370k supplied and 247k borrowed, indicating shrinking participation and reduced utility.
Because crvUSD on Aave currently relies on a market oracle, bad debt creation from oracle markdown is bounded by the liquidation threshold of the collateral that provides the highest effective borrowing power against crvUSD. In the current configuration, that binding threshold is 80%. Under this structure, for the protocol to realize losses purely from the borrow-side “debt marked below par” dynamic, crvUSD would need to depeg to under 0.80 and then mean-revert rapidly before positions could be brought back into solvency via liquidation/repayment at the impaired price.
The fact that crvUSD was not included in high-efficiency, highly correlated E-Modes further constrained the tail risk. E-Modes typically feature higher LTs, reaching up to ~92%, which would have compressed the “distance to bad debt” substantially. By remaining outside those configurations, the protocol avoided a regime where even comparatively smaller depegs could create a materially narrower buffer before potential bad debt conditions.
In this context, deprecating crvUSD as a borrowable asset has low opportunity cost to users while improving protocol robustness by preventing incremental exposure in a market that is both shrinking and exhibiting signals of peg fragility.
Specification
| Instance | Asset | Current Supply Cap | Recommended Supply Cap | Current Borrow Cap | Recommended Borrow Cap |
|---|---|---|---|---|---|
| Ethereum Core | crvUSD | 5,000,000 | 1 | 2,500,000 | 1 |
Next Steps
We will move forward and implement these updates via the Risk Steward process.
Disclosure
Chaos Labs has not been compensated by any third party for publishing this AGRS recommendation.
Copyright
Copyright and related rights waived via CC0.