USDP Price Spike Impact - 04/16/2024

[ChaosLabs]

Summary

An overview of the recent USDP price spike and its effects on the Aave protocol.

Analysis

On April 16, 2024, at 12 pm ET, following a temporary spike in the price of USDP on several exchanges, including Coinbase and Binance (shown below), the stablecoin’s price reported by the Chainlink Oracle reached a high of over $1.20.

Coinbase

Binance

As USDP cannot be used as collateral, the risk to the Aave protocol was limited. However, as it is a borrowable asset on Aave V2 on Ethereum, the 16.75% price increase in a single update — from $1.064 to $1.243, led to liquidations, causing small amounts of bad debt, described below.

In total, $2.4M worth of collateral was seized, $1M of which came from a single user who now maintains a health score of 1.31.

Bad Debt

Overall, the protocol incurred bad debt amounting to ~$1.36k, by to 2 accounts.

1. The largest had over $500K worth of USDC collateral seized and currently holds a health score of 0.02, with bad debt worth $1.3K.
2. The second user with bad debt was liquidated for $250K, has a health score of 0.4, and bad debt currently worth $426.

This occurred when the USDP’s oracle price surged by 16.5% in a single update, pushing respective debt positions well above the liquidation threshold. Consequently, as these positions’ health fell below 1, they began to be liquidated at the inflated relative debt value, with the liquidation bonus further siphoning collateral.

Next Steps

As part of the ongoing efforts of deprecating V2 markets, we will share a proposal for LT reductions on major stablecoins and the deprecation of smaller non-collateral stablecoins across V2, including USDP, for the community’s consideration.

[2theMoon]

@ChaosLabs

As USDP cannot be used as collateral, the risk to the Aave protocol was limited.

I see a MAJOR risk for ALL deposited assets in aave V2 putting more than 1.5b deposited collateral at major risk.
kindly contact me in discord or by pm and I will explain

[2theMoon]

@2theMoon

@ChaosLabs

As USDP cannot be used as collateral, the risk to the Aave protocol was limited.

kindly contact me private. I am aware that USDP is not eligble as colleteral and still I will explain you a method how to possibly drain all the other deposited funds

[liquidatee]

If no immediate action can be taken (perhaps hardcoding the oracle price) at the protocol level to resolve the issue, the issue must instead be raised vigorously with your contacts at Paxos. Liquidity must be supplied to USDP in order to prevent this from occurring once more.
It is quite clear that it was negligent to continue to support this asset despite the lack of liquidity - whilst, of course, this is DeFi, and users should take responsibility for their actions, it’s fair to say that users of Aave should not have the expectation that they might lose half, or all, their position value due to completely shoddy oracles. Discussion on the viability of compensating, at least partially, the victims of this oracle manipulation, would be appreciated.

[liquidatee]

One thing this post doesn’t stress enough is just how illiquid USDP is. It took just $100k volume on Binance to raise the price 50%.