DeFi Protocols Aave and Compound Finance Limit Borrowing

source: unsplash

DeFi lenders Aave and Compound Finance have decided to freeze markets and cap loans in an attempt to mitigate risks caused due to extreme market volatility under the current circumstances. 

On Sunday, Aave passed a resolution freezing the borrowing of 17 assets in its Ethereum liquidity pool, including Gemini Dollar (GUSD), Curve DAO (CRV), Yearn.Finance (YFI), 1inch (1INCH), Maker (MKR), and several other stablecoins

Migration to V3

“Out of an abundance of caution and given the community’s current lower risk tolerance, we recommend temporarily freezing the assets outlined above in an effort to derisk Aave V2 and promote eventual migration to V3,” read the proposal written by DeFi infrastructure company Gauntlet Network.

The move is believed to be primarily fueled by a failed exploit attempt, which left the protocol with $1.5 million in bad debt.

Making millions by shorting CRV

A trader, who goes by Avraham Eisenberg on Twitter, borrowed $20 million worth of CRV tokens by pledging $40 million in USDC stablecoin on Aave. He apparently attempted to sell CRV tokens, which would have tanked the coin’s price and made him millions on short positions. 

Eisenberg even outlined his plan on Twitter in October while mocking Aave as a “safe protocol.” 

Compound follows

Spooked by the recent events, yesterday – just days after the Aave exploit – Compound Finance passed a similar resolution to implement loan limits on 10 tokens, including Chainlink (cLINK), Aave (cAAVE), Wrapped Bitcoin (cWBTC2), and Uniswap (cUNI).

“This set of parameter updates seeks to maintain the overall risk tolerance of the protocol while making risk trade-offs between specific assets,” read the proposal. “Our parameter recommendations are driven by an optimization function that balances 3 core metrics: insolvencies, liquidations, and borrow usage.”

Both Aave and Compound are leading DeFi lending platforms accounting for locked value worth $3.7 billion and $1.7 billion, respectively, according to data aggregator DefiLlama.

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Himan Mohapatra
Himan Mohapatra
Himan Mohapatra is an industry expert within the crypto-sphere and the primary journalist for Coinmash. He is an expert in finance and disruptive tech, such as blockchain.