Aave experienced a record number of liquidations but benefited from the associated fees, maintaining stability at the protocol level. GHO tokens held their $1 value, avoiding any negative impact on other yield protocols or decentralized exchanges (DEX).
After a sell-off, AAVE recovered to over $100, and ETH rose above $2,500, demonstrating resilience in the face of market turbulence.
Aave Survives Market Turbulence and Record Liquidations
One of the main concerns during market turbulence is liquidations in DeFi, which can affect loan protocols. On August 5, Aave experienced record liquidations amounting to $237 million, bringing the total liquidations to $441 million. Despite this, Aave successfully endured its biggest stress-test, while centralized markets saw liquidations exceeding $1 billion.
Source: X
In the aftermath, Aave retained over $10.8 billion in total value locked. Personal loans on Aave are always over-collateralized, although some were affected. Most of the collateral involved WETH, while the liquidated loans were primarily for USDT and USDC. Meanwhile, GHO, Aave’s native stablecoin, maintained its $1 peg.
The protocol benefited from the market turbulence, generating $6 million in revenues in a single day. Aave continued with much smaller liquidations on August 6, affecting a limited number of wallets.
A significant fear for Aave and DeFi in general is that a price crash could lead to widespread liquidations and contagion. However, the ecosystem has so far contained the damage to personal wallet risk. The latest price crash was the deepest since the fall of FTX in 2022, yet the markets were better prepared to absorb it.
While crypto remains risky for individual users at certain price levels, DeFi remains viable at the protocol level. Traders noted that liquidity providers on Aave were not harmed, and the protocol did not cause contagion. Unlike centralized lending protocols like Celsius, which caused panic by locking up withdrawals, DeFi has no power to stop withdrawals as long as smart contract conditions are met.
The only potential contagion risk from Aave is through its GHO stablecoin. GHO has been adopted by platforms like Balancer, Maverick, and Curve and is typically used for yield farming, being generated through Aave V3 on Ethereum. The stablecoin is over-collateralized, offering quick generation and burn access. The recent market sell-off was the first major stress test for GHO, which resulted in no bad debt or contagion to liquidity pools.
Aave’s Liquidators Earn Big Amid Market Volatility
The recent market volatility provided liquidators on Aave with $1.68 million in liquidation bonuses. The top liquidator managed loans worth $7.89 million, accounting for approximately 25% of the latest liquidations.
Liquidators play a crucial role in managing risk on Aave by targeting wallets close to liquidation levels on their collateral. They buy up the collateral at a discount and earn liquidator fees.
The busiest day for liquidators occurred on the Ethereum V3 lending hub, where they earned over $11.86 million in bonuses from a total of 2,250 liquidations. Smaller bonuses were also earned on Arbitrum and Optimism. Aave showed minimal activity on its Polygon and Avalanche versions.
Aave’s recent performance highlighted Ethereum as the most active network. Temporary market conditions raised average transaction fees to $44 due to the need for on-chain liquidations.
Aave V3 now leads in terms of deposits and attracts new active wallets from all chains. The Ethereum-based V3 remains the most liquid, bringing in 42,652 unique active users and new wallets from the Base blockchain.
AAVE Token Rally and Current Market Position
The recent market downturn caused AAVE to drop to a low of $77. However, the protocol’s native token has since rallied back above $100. Despite its recovery, AAVE is still considered relatively undervalued, especially when compared to its outstanding loans and total value locked. Currently, it is barely in the top 50 coins and has most of its tokens in circulation.
The Aave protocol holds more value than MakerDAO, which locks in $4.66 billion. With the recent recovery of Ethereum (ETH), Aave benefits from having only a small number of wallets at risk. These wallets are vulnerable if ETH prices fall below $2,500, but the market recovery on Tuesday saw ETH rise to $2,577.55, alleviating some of the risk.
Important: Please note that this article is only meant to provide information and should not be taken as legal, tax, investment, financial, or any other type of advice.
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