Q4-2022 Risk-Off Measures

On November 22, 2022, Aave had its first meaningful insolvency since the launch of V2 and six weeks after the Mango Squeeze on October 11, 2022. The Mango Squeeze heightened community awareness of the preexisting market risks associated with illiquid assets. Below we provide a recap of the community efforts and actions taken.

  • 2022-10-11 — Mango Squeeze event
  • 2022-10-17 — Gauntlet posted an ARC to reduce illiquid asset risk
  • 2022-10-21 — Gauntlet proposed borrow caps, supply caps, pausing borrow, and LT changes for v2 ETH, v2 Polygon, and v3 Polygon (AIP 111, AIP 112)
  • 2022-11-11 — Gauntlet provided Market Downturn Analysis on protocol performance and risk following the FTX collapse
  • 2022-11-11 — Gauntlet provided an analysis on SNX regarding utilization on the V2 ETH market reaching 100%
  • 2022-11-12 — Gauntlet proposed to freeze REN (AIP 117) in response to a threat from an FTX attacker with $300M+ in assets related to REN
  • 2022-11-13 — Gauntlet proposed to freeze CVX (AIP 118) and BAL (AIP 119) due to concerns with market liquidity and lower liquidity in the market
  • 2022-11-17 — Gauntlet posted an ARC to reduce the liquidation threshold for REN based on risk levels
  • 2022-11-21 — Gauntlet proposed AIP 120 to reduce the liquidation threshold for REN based on risk levels
  • 2022-11-22 — CRV insolvency event [1]
  • 2022-11-22 — MonetSupply proposed a community discussion to reduce long-tail asset risk
  • 2022-11-22 — At 17:37, Gauntlet proposed AIP 121 along with an ARC to temporarily freeze 17 assets on v2 ETH market
  • 2022-11-22 — Gauntlet proposed pausing borrowing for LINK (AIP 122) and UNI (AIP 123)
  • 2022-11-23 — Gauntlet posted a snapshot to add borrow caps to FRAX, MAI, and LINK on V3 AVAX
  • 2022-11-23 — Gauntlet proposed AIP-124 to temporarily freeze assets on v2 Polygon market
  • 2022-11-23 — Llama and Gauntlet posted an ARC to recapitalize the CRV market
  • 2022-11-23 — Chaos Labs snapshot after ARC to add v3 supply caps for uncapped assets
  • 2022-11-24 — BGD proposed a community discussion to improve reaction speeds
  • 2022-11-25 — Llama and Chaos proposed AIP 125 along with an ARC to amend AIP-121 on 7 assets
  • 2022 -11-25 — BGD proposed a community discussion on WBTC’s pricing mechanism
  • 2022-11-26 — Llama and Chaos proposed AIP 126 along with an ARC to pause borrowing and temporarily freeze assets on v2 Polygon market
  • 2022-11-26 — Llama, Gauntlet, Chaos, BGD, and ItsFreeRealEstate posted an ARC to halt listings on Aave v1 and v2
  • 2022-11-30 — Gauntlet posted an ARC to adjust interest rate parameters and reserve factors for two assets on v2 ETH (ongoing)

This post will be updated throughout the quarter to provide a source of truth for all risk-related measures taken by the community.

[1] More detail on CRV insolvency event:

  • 2022-11-13 — 0x57e0 deposits $38.9M USDC into the Aave v2 market
  • 2022-11-13 to 2022-11-21 — The user would borrow ~17M CRV in different increments and offload them across 1inch and other CEXs. A CRV supplier (0x7a16) had 174M CRV ($110M) supply balance within the CRV liquidity pool, representing 27% of circulating supply. The CRV market price decreased from $0.61 to as low as $0.41 (33% decrease)
  • 2022-11-22
    • 08:12 UTC, 0x57e0 made 4 additional deposits totaling ~$24M USDC, borrowed 55M CRV valued at $36M, transferred 30M CRV to CEXs, and swapped further CRV on 1inch.
    • 10:35, the CRV market price dropped to its lowest value of $0.4096.
    • 11:00, the CRV market price started to rebound with added momentum from Curve’s release of their LLAMMA whitepaper.
    • 13:31, the first liquidation to the user took place. The user’s USDC collateral position was fully liquidated within the day, with approximately $63M USDC liquidated and $1.7M of bad debt left on the protocol.

Unfortunate event, got two questions to a friendly member to solve.

Would the liquidation engine have worked more efficiently had the curve team not intervened to counter the dump by releasing the stablecoin whitepaper?

And what was the intention of 0x57e0? to liquidate the big curve whale and then repay cheaper?

1 Like

The post from @Pauljlei is a fabulous retro for people to understand the whole event.

And we just released an in-depth analysis too, in which we point out that risk managers in DeFi should consider both price and liquidity factors and establish risk control parameters that can adjust proactively based on market liquidity information.

In the long run, DeFi protocols need a feedback system that combines a safety cushion and various sensors based on real-time liquidity vectors to detect defects and respond to market changes.

The risk council proposal by BGD is an essential first step toward improving the efficiency of Risk management. And we’d like to work with anyone devoted to such a critical task.

Any comment regarding our analysis is more than welcomed!

And to answer the question from @Semicrypto :
We do find the latency of liquidations. It was closely related to the two dramatic price rallies of CRV and the trading activity of short squeezers. However, we believe that to boost efficiency cannot expect traders to behave more rationally. Instead, the community needs to improve sensitivity to real-time price and liquidity changes and take contingency measures at the protocol level.