Around $27 million was liquidated on decentralized lending platform Aave in the last 24 hours, which some market participants believe may have been caused by a temporary pricing glitch involving the wstETH token.
Blockchain data reported by risk management firm Chaos Labs shows an increase in liquidations over the past 24 hours. Some observers believe the event may have been linked to a pricing update in an oracle system that Aave uses 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 secure 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 around $1 instead of around $2,200, leaving the protocol with nearly $1.8 million in bad debt.
In Aave’s case, some say the problem could involve wstETH, a token issued by Lido that represents ether staked. Because it accumulates staking rewards over time, a wstETH is generally worth a little more than an ETH.
According to an article from LTV Protocol on
Volume has remained relatively low for wstETH trading pairs, with only $10 million traded in the last 24 hours, so it is unlikely that any astute trader took advantage of the price mismatch before it re-emerged.
Aave’s spokesperson did not respond to CoinDesk’s request for comment.
Earlier today, risk management firm LlamaRisk briefly posted a post on the AAVE forum, attributing the liquidations to an issue with Chaos Labs’ risk oracle, before deleting it.
Chaos Labs later said that the underlying oracle itself had reported the correct market values and that the liquidations were instead triggered by a configuration issue in the protocol’s CAPO risk oracle, which is designed to impose limits on how quickly the value of yield-bearing 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According to Chaos Labs, the incident was caused by a mismatch between outdated parameters stored in a smart contract, including a reference exchange rate and its associated timestamp. Since these values were not updating in sync, the CAPO system temporarily calculated a maximum allowed exchange rate lower than the actual market value of wstETH.
This effectively caused the protocol to treat wstETH as being approximately 2.85% less valuable than it actually was, pushing some borrowing positions below their safe thresholds, triggering liquidations.
Chaos Labs said the protocol did not incur any bad debt, although liquidators – traders or bots who repay risky loans in exchange for discounted collateral – captured around 499 ETH in liquidation bonuses and profits from the temporary price gap.
A Lido contributor told CoinDesk: “We are aware of liquidations due to incorrect pricing of wstETH to USD reported by this oracle mechanism. The cause has nothing to do with wstETH itself, its operation or the Lido protocol which continues to function normally.
Oliver Knight contributed reporting to this story.
Read more: Aave governance gap deepens as major governance group exits $26B DeFi protocol
