Aave Halts Stablecoin Trading on V3 Avalanche After An Analysis

• Aave halted the stablecoin trading on v3 Avalanche due to activity surges on the CEXs.
• The halt follows as an analysis from DeFi’S risk manager firm considers different scenarios for the USDC price.

Aave, a lending protocol, has halted stablecoin trading as an analysis from DeFi’s risk manager firm Gauntlet Network considers different scenarios for the USD Coin (USDC) price. Aave has set the loan-to-value (LTV) ratio to zero in response to recent price volatility on stablecoins after USD Coin depegged on March 11th. 

Aave’s Recent Decision

Due to the current volatility surrounding stablecoins, “Aave DAO has frozen USDC, USDT, DAI, FRAX, and MAI on Aave v3 Avalanche. This measure prevents new positions from adding risk to the protocol.”

Aave’s governance forum stated that the trading freeze follows an analysis from Decentralized Finance (DeFi) risk management company Gauntlet Network. In which the company recommended that all v2 and v3 markets should be temporarily paused.

A participant in the forum discussion noted that “setting LTV to 0 definitely helps everywhere, but on the Avalanche v3 Pool, given that cross-chain infrastructure doesn’t cover Avalanche, the Aave Guardian can act immediately. Setting LTV to 0 in practice discounts the “borrowing power” of the asset, without affecting the HF of any user position.”

LTV is an important metric that determines how much credit users can secure using crypto as collateral. It is expressed as a percentage, while the ratio is calculated by dividing the amount of credit borrowed by the value of the collateral.

According to risk analysis of Gauntlet, it examined the number of insolvencies that might occur under different scenarios, considering that the price of USDC stabilizes, recovers or declines significantly, “V3 emode assumes correlation of stablecoin assets, but at this time, those correlations have diverged. The risk has increased given that the liquidation bonus is only 1% for USDC on emode. To account for these assumptions that no longer remain true, we recommend pausing the markets. […] At current prices, insolvencies are ~550k. These can change depending on the price trajectory and further depegs.“

Notably, most of the Centralized crypto exchanges experienced a surge in trading volume in the past hours following the Silicon Valley Bank (SVB) collapse on March 10, as per the data sourced from digital assets data provider, Kaiko.

Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation on March 11 after a bank run triggered by the bank’s latest financial reports. The report showed the bank had sold a large chunk of securities worth $21 billion — at a loss of about $1.8 billion. Meanwhile, the California watchdog also appointed the Federal Deposit Insurance Corporation as the receiver to protect insured deposits.

Furthermore, a crypto firm, Circle, also disclosed on March 11 that $3.3 billion of its $40 billion reserves were stuck at SVB. This announcement resulted in its price falling below its $1 peg and also affecting other stablecoins.

Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.

Latest posts by Nancy J. Allen (see all)