Decentralized lending protocol, faces volatility and low liquidity weaknesses in select lending markets on its protocol leading to a recently executed proposal to freeze about 17 token markets from its lending services.
As per previous block reports, a massive short position worth approximately $57 million was opened on the Aave protocol, the largest lending protocol on the Ethereum blockchain leading to an unstable market in CRV(Curve DAO token), the borrowed asset. Details on the event say the trader continuously sold off the borrowed asset, leading to declining in CRV market value.
Curve DAO saw its market value deep to two-year lows, however, this lasted for a few hours as it rebounded over 50%, nullifying its earlier 25% loss.
A proposal deployed shortly after Aave took a $1.6 million loss in an attempt to liquidate the borrower following the rapid Curve price surge in response to the trader's selling activities, was fully supported with over 536k Aave voting YAE. The proposal is to temporarily change the Aave lending market, freezing about 17 considered volatile assets on the protocol.
Although the Aave protocol has previously said that the treasury could cover the bad debt, the platform intends to mitigate the risk of a more catastrophic event.
At the time of writing, the following crypto assets have been temporarily frozen from the Aave lending protocol:
YFI, CRV, ZRX, MANA, 1inch, BAT, sUSD, ENJ, GUSD, AMPL, RAI, USDP, LUSD, xSUSHI, DPI, renFIL, and MKR.
The proposal was created on November 22 and ended on 26 November. As of 27 November 2022, it has been executed with a 100% vote of over 536k Aave backing. Given this, 17 crypto assets including Curve DAO CRV, yearn.finance YFI and Maker MKR have been frozen and onwards won't be accepted as collateral for loans on the Aave lending protocol.