DeFi protocols Aave and Compound have implemented new security measures in light of the current turmoil in the crypto markets.
On Sunday, Aave executed a proposal to freeze the markets for 17 different assets from the Aave V2 loan pool on the Ethereum network, including Yearn.Finance (YFI), Curve DAO (CRV), Gemini Dollar (GUSD), Maker (MKR ), and 1 inch (1INCH) tokens.
Aave and Compound, the two crypto lending protocols, account for $3.7 billion and $1.7 billion respectively of the total value locked in the DeFi ecosystem, according to DeFi Flame. They have both seen huge downward swings over the past month. Aave has 31% less assets on its platform compared to a month ago. Meanwhile, Compound is down 26% in the past 30 days.
“DeFi protocols are battle-tested and show how communities can implement new parameters to improve risk mitigations in rapidly changing volatile market environments,” said Aave Founder and CEO, Stani Kuleshov. Decrypt. “It was fascinating to watch the DeFi community discuss, propose, vote on and implement new parameters – with incredible transparency – to adapt and save the protocol. That’s what it’s all about.
Despite the timing, none of the proposals are a reaction to the most recent market news: BlockFi files for bankruptcy on Monday, after weeks of speculation that he should do so after The collapse of FTX beginning of November. The Aave and Compound proposals were created last week and have much more to do with eliminating the means for traders to manipulate the markets and trigger a short squeeze.
Recently Avraham Eisenberg, the trader responsible for the Mango Market hack in October, borrowed 40 million CRV tokens on Aave. He seemed to be preparing to sell the tokens, which would have caused the CRV price to drop and allow him to earn millions on short positionsderivative contracts that allow traders to bet against the price of an asset.
It’s not just speculation, Eisenberg himself described his plan on Twitter in October. But that did not work.
Gauntlet, a financial modeling platform employed by Aave, recommended a few changes to better protect the protocol: “The attempt to compress CRV on Aave was unsuccessful and unprofitable. Despite this, Aave has accumulated a much smaller insolvent position,” the company wrote. “Our immediate recommendation is to freeze a number of tail assets on v2 to mitigate the risk of similar, likely unprofitable cuts.”
In a similar move, members of the Compound DAO unanimously approved a measure to set borrowing caps for 10 tokens, including protocol versions of Wrapped Bitcoin (cWBTC2), Uniswap (cUNI), Chainlink ( cLINK) and Aave (cAAVE). Compound versions of these tokens, identified by the “c” at the beginning of the token name, allow holders to earn interest on assets they have deposited in lending pools.
“Aave V2 lacks many of the risk controls that Aave V3 addresses (supply caps, borrow caps, isolation mode, electronic mode, etc.),” wrote Paul J. Lei, Protocol Program Manager at Gauntlet, in the proposal now adopted. “Out of an abundance of caution and given the current low risk tolerance of the community, we recommend temporarily freezing the assets described above in an effort to reduce the risks of Aave V2 and promote an eventual migration to V3.”
Aave V3, a new version of its V2 lending protocol with more security and cross-chain functionality, launched on Fantom, Avalanche and Harmony networks and Arbitrum, Optimism and Polygon Layer 2 scaling solutions in March . In October, the Aave community approved by an overwhelming majority a proposal to deploy Aave V3 on Ethereum.
Lei also wrote the Recently Approved Compound Proposalciting dashboards on the financial modeling platform to assert that “setting borrowing limits avoids high-risk attack vectors while sacrificing little capital efficiency and enabling threat organic loan demand”.
Clearly, the borrowing limits approved by Compound still leave room for people to borrow the assets. He writes that the vast majority of borrowing, over 96%, on Compound is in stablecoins and that capped borrowing for non-stable assets will impact a very small portion of the protocol’s activity.
“As organic demand for borrowing increases,” Lei said, “the community may re-evaluate borrowing limits and increase accordingly based on consideration of market risk.”
So far, market risk and volatility have persisted over the past month.
November 16, GUSD lending rates hit 73% after the crypto exchange announced withdrawals from its Earn product may be delayed after Genesis, which maintains the product, the withdrawals were purely and simply stopped.
The spike in rates had two likely causes: Speculators were attempting to short GUSD in anticipation of Gemini’s collapse. It’s also possible that GUSD holders were pressured to convert their tokens into an alternative asset, fearing that Gemini might not be able to honor redemptions. (He has.)
As of this writing, both of these fears were unfounded.
Gemini did not collapse, although the exchange said on Twitter that it is still working with Genesis to restore withdrawals from its Gemini Earn product. And since the company suspended Earn withdrawals, Gemini has honored over $200 million in GUSD redemptions, according to DeFi Flame. That’s a big drop in circulation, given that GUSD currently has a market cap of $601 million.
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