Ethereum lending protocol Aave faced a temporary liquidity shock this week. Large wallet holders pulled $1.7 billion worth of ETH from the platform. This sharp move caused a surge in borrowing costs and forced many users to exit leveraged positions.
Wallets that belong to crypto influencer Justin Sun withdrew more than $646 million in ETH within the past three days alone based on Arkham’s on-chain data. A wallet connected with HTX for Sun is an advisor, also withdrew Ethereum valued at $455 million.
More funds followed. Abraxas Capital Management redeemed $115 million of ETH. These massive redemptions reduced Aave’s usable liquidity. The platform followed up with rising rates of interest, as it was programmed to do when supply fell.
Ethereum looping crash triggers record unstaking
Traders using a strategy called “looping” missed out. They borrowed ETH with ETH collateral, rewriting the cycle for optimizing staking gains. But increased borrowing fees immediately caused their gains to become losses. To manage risk exposure, they frantically liquidated.
That involved withdrawing ETH from staking providers. On Wednesday, more than 627,000 ETH, worth around $2.3 billion, queued for unstaking, marking the record-largest backlog for exiting. The network will need almost eleven days to clear the queue that currently exists, according to Beaconcha.
Whilst interest rates mostly reverted from previous levels, the damage was done. The incident showed how a small number of whales might turn the whole DeFi world upside down. Aave is still the largest lending protocol on Ethereum, with over $55 billion locked. But trust is fragile when big players move funds
Ethereum looping turns risky for DeFi users
There was a short time of profiteering for Ethereum borrowers. But the fallout for loopers illustrates how quickly DeFi profits can flip. Liquidity is a key component of this platform, and a sudden disappearance of billions of ETH affected both users and protocols.
Things like this occur. Looping, being profitable, also carries inherent risk. In our last year, a change of code on a different protocol lost a corresponding strategy worth $26 million.
For the time being, wallets tied to Sun still hold $80 million of ETH on Aave. But that larger point is that whale moves do make a difference. And in DeFi, more frequently than not, yield or loss does come down to time.
