That Ethereum-based protocol for decentralized finance (DeFi) Aave suffered an attack led by Avraham Eisenberg. The controversial person was behind an elaborate run against Mango Markets. The run has been called an attack by some and a clever strategy by others.
Aave (AAVE) is trading at $57 down 7% and 36% in the last 24 hours and the previous week respectively. The native token CRV from Curve Finance was also part of the attack. This token faced significant selling pressure in the short-term but trended higher during today’s trading session.
AAVE is trading sideways on the daily chart after a downtrend. Source: AAVEUSDT trade view
Orchestrating an attack on Aave, first attempt?
Rudy Kadoch, founder of portfolio management project Nested, summarized yesterday’s event and the “bad debt” attack on Aave. According to this report, Eisenberg has loaned $83 million to CRV and $50 million to CRV stablecoin USDC used as collateral on the decentralized finance platform.
Eisenberg released the thesis supporting this strategy via his Twitter account in October 2022. It was public and its objectives were perfectly outlined: to use its initial capital to increase the price of an illiquid token such as CRV or Ravencoin (RVN) in hopes of creating “bad debt,” excessive liability inherited from the protocol.
Check out recent activity in @CurveFinance’s $CRV pools on @AaveAave V2!
Over the past few days, the $CRV pools on Aave have seen a significant increase in both lending rate and volume, which will likely result in a short position in $CRV. 👇 pic.twitter.com/Hx5Bt42Ks6
— Messari (@MessariCrypto) November 22, 2022
To pay off this debt, Aave would trigger an auction mechanism that would involve selling AAVE on the spot market. By taking a short position on this token, Eisenberg would benefit.
I have been told that Aave is completely safe, so here is the possible trading strategy. No financial or legal advice, but if this makes 9 figures, feel free to send a tip
Note that starting with more initial capital increases the chances of success and win percentage pic.twitter.com/HKAF7Y5ogM
— Avraham Eisenberg (@avi_eisen) October 19, 2022
By pacing the price of the underlying security, Aave’s borrower can “at least” double or quintuple its price. As Kadoch noted, this attack failed due to a lack of capital. The actor attempted to liquidate a CRV whale to incur bad debts.
However, while the attack was in progress, the team behind Curve Finance released the white paper for a stablecoin, crvUSD. This announcement supported the token’s price and changed the trend. Kadoch remarked:
– $sdCRV, $cvxCRV, $yCRV depeged a lot with more than 10% discount to get $CRV back.
– People pay more than 200% to borrow $CRV.
– People say that Aave is not safe while the system was ready for such an event.
Aave’s future in jeopardy?
On the other hand, the protocol worked as designed without any centralized intervention. The team behind Aave claim that they are committed to the community and the DAO will talk about the recent incident.
With that in mind, the protocol could introduce changes in the coming days to mitigate “long-tail asset risk.” Many believe Eisenberg will resume his attack on protocol once he can pool more capital.
You can call it an attack on AAVE, but I actually think they made a mistake by not putting a hard cap on how much CRV/other illiquid coins you can use as collateral for AAVE. Otherwise you get a similar problem as with FTT.
— DeFiac (@TheDEFIac) November 23, 2022
The bad debt attack on Aave was similar to the situation that led to the FTX collapse. The failed issued company held massive amounts of FTT, its native token. As the asset’s price plummeted, Sam Bankman-Fried’s empire followed.
Unlike FTX, as many users pointed out, anyone can access on-chain information about Eisenberg’s transactions, the state of the protocol’s finances, and the amount of bad debts on its balance sheet. This transparency is the key difference between centralized ecosystems and decentralized protocols. The team behind Aave explained:
Most importantly, today’s events are in contrast to what we’ve seen with centralized entities in the space – the transactions were fully traceable and auditable on-chain, providing transparency for users and the community.
Source: Crypto News Deutsch