Aave Takes Action to Mitigate Risk as Stablecoin Volatility Rattles DeFi Markets
Due to the recent price volatility of stablecoins, Aave, a lending protocol, has taken measures to freeze stablecoin trading and set the Loan-to-Value (LTV) ratio to zero.
The USD Coin (USDC) depegged on March 11, prompting DeFi’s risk manager company Gauntlet to recommend temporarily pausing all V2 and V3 markets.
Participants in Aave’s governance forum noted that setting LTV to zero would discount the borrowing power of assets without affecting user positions’ HF, especially on the Avalanche V3 Pool.
LTV is a crucial metric used to determine the credit that can be secured using crypto as collateral.
To assess potential insolvencies, Gauntlet’s risk analysis considered different scenarios and found that insolvencies were estimated to be around 550k at current prices.
The risk increased as liquidation bonuses for USDC on emode were only 1%, and correlations among stablecoin assets were assumed but diverged.
READ MORE: Bitcoin: “Don’t Expect a Quick Bull Run” – Lyn Alden
Silicon Valley Bank’s collapse on March 10 triggered a bank run, leading to centralized crypto exchanges’ surge in trading volume.
Two big $USDC markets on exchanges seeing heavy sell pressure and huge volumes in last 24 hours
Despite plenty of reassurance on crypto twitter, most investors still selling USDC at a big discount pic.twitter.com/W9uy2HHax4
— Conor Ryder (@ConorRyder) March 11, 2023
The California Department of Financial Protection and Innovation shut down SVB on March 11, appointing the Federal Deposit Insurance Corporation (FDIC) as the receiver to safeguard insured deposits.
As a result, Circle, the company behind USDC, disclosed on March 11 that $3.3 billion of its $40 billion reserves were stuck at SVB, causing a fall in major stablecoin prices below their $1 peg and impacting various stablecoin ecosystems.
Alexander Stefanov
Reporter at CoinsPress
Alex is an experienced finance journalist and a cryptocurrency and blockchain enthusiast. With over five years of experience covering the industry, he deeply understands the complex and constantly evolving world of digital assets. His insightful and thought-provoking articles provide readers with a clear picture of the latest developments and trends in the market. His passionate approach allows him to break down complex ideas into accessible and insightful content. Follow up on his content to be up to date with the most important trends and topics - stay ahead of the curve with CoinsPress.
