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.
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.
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.