Around $27 million was liquidated on decentralized lending platform Aave over the past 24 hours, in what some market participants say may have been caused by a temporary pricing issue involving the wstETH token.
Blockchain data reported by risk management firm Chaos Labs shows an increase in liquidations in the last 24 hours. Some observers believe the event may have been related to a price update in an Oracle system that uses Aave to determine the value of collateral.
Oracles are services that feed price data from the outside world into blockchain applications. Lending protocols like Aave rely on them to decide when a borrower’s collateral is no longer sufficient to back their loan, at which point the position can be liquidated.
While such scenarios are rare, most recently, a misconfigured price oracle setup by DeFi lender Moonwell briefly valued Coinbase Wrapped ETH (cbETH) at about $1 instead of about $2,200, leaving the protocol with nearly $1.8 million in bad debt.
In the case of Aave, some say the issue may have involved wstETH, a token issued by Lido that represents staked ether. Because it accumulates staking rewards over time, one wstETH is typically worth a little more than one ETH.
According to a post by LTV Protocol on
Volume remained relatively low for wstETH trading pairs, with just $10 million traded in the last 24 hours, so it’s unlikely any clever traders will capitalize on the price mismatch before it recovers.
Aave spokesperson did not respond to CoinDesk’s request for comment.
Earlier in the day, venture firm LlamaRisk briefly published a post on the AAVE forum, attributing the liquidations to an issue with the Chaos Labs risk oracle, before deleting it.
Chaos Labs later said that the underlying oracle itself reported correct market values and that the liquidations were instead caused by a configuration issue in the protocol’s CAPO risk oracle, which is designed to impose limits on how quickly the value of yield-generating tokens, such as wstETH, can increase.
According to Chaos Labs, the incident was caused by a mismatch between outdated parameters stored in a smart contract, including a reference exchange rate and its associated timestamp. Because those values were not updated synchronously, the CAPO system temporarily calculated a maximum allowed exchange rate that was lower than the actual market value of wstETH.
That effectively caused the protocol to treat wstETH as about 2.85% less valuable than it actually was, pushing some borrowing positions below their safety thresholds, triggering liquidations.
Chaos Labs said the protocol did not incur any bad debts, although liquidators (traders or robots that repay risky loans in exchange for discounted collateral) captured approximately 499 ETH in liquidation bonuses and profits from the temporary price discrepancy.
A Lido contributor told CoinDesk: “We are aware of liquidations due to an incorrect price of wstETH to USD reported by this oracle mechanism. The cause has nothing to do with wstETH itself, how it works, or the Lido protocol continuing to function normally.”
Oliver Knight contributed reporting to this story.
Read More: Aave Governance Gap Deepens as Major Governance Group Leaves $26B DeFi Protocol
