Ethereum-based decentralized finance (DeFi) protocol Aave has suffered an attack led by Avraham Eisenberg. The controversial individual was behind the sophisticated attack against Mango Markets. Some call escape an attack and others call it a smart strategy.
Aave (AAVE) is trading at $57 with a loss of 7% and 36% in the last 24 hours and the previous week. CRV Curve Finance’s native token was also part of the attack. The token has seen significant selling pressure in the short-term, but has been trending upward during today’s trading session.
Organizing an attack on Aave, the first attempt?
Rudy Kadoch, founder of the Nested portfolio management project, in summary yesterday’s event and the “Bad Debt” attack on Aave. According to the report, Eisenberg borrowed $83 million from CRV and used $50 million of USDC stablecoin as collateral on the decentralized financial platform.
Eisenberg published a thesis supporting this strategy in October 2022 via his Twitter account. It was public and its goals were perfectly outlined: to use its initial capital to influence the price of an illiquid token like CRV or Ravencoin (RVN), hoping to create “bad debt”, an excessive liability assumed by the protocol. .
— Messari (@MessariCrypto) November 22, 2022
To repay this debt, Aave would launch an auction mechanism that involves selling AAVE on the spot market. By taking a short position in this token, Eisenberg would profit.
I have been advised that aave is perfectly safe, so here is a potential trading strategy. Not financial or legal advice, but if you make 9 figures on this, feel free to send a tip
Note that starting with more initial capital increases the chances of success and the percentage of profit pic.twitter.com/HKAF7Y5ogM
— Avraham Eisenberg (@avi_eisen) October 19, 2022
By requesting the price of the underlying collateral, the Aave borrower can double or increase its price by five times “at least”. This attack was unsuccessful, Kadoch noted, due to a lack of capital. The actor tried to liquidate the CRV whale to create a bad debt.
However, as the attack was being carried out, the team behind Curve Finance published a whitepaper for the stablecoin, crvUSD. This announcement supported the price of the token and shifted the trend. Kadoch noted:
– $sdCRV, $cvxCRV, $yCRV heavily debugged with more than 10% off to get $CRV back.
– People are paying over 200% to borrow $CRV.
– People saying that Aave is not safe while the system was prepared for such an event.
Aave’s future in jeopardy?
On the other hand, the protocol worked as it was supposed to without centralized intervention. The team behind Aave says they will talk to the community and DAO about the recent incident.
In this sense, the protocol could introduce changes to mitigate “long-term asset risk” in the coming days. Many believe that Eisenberg will renew his attack on the protocol once he can raise 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 on AAVE. Otherwise, you have a similar problem as with FTT.
— DeFiac (@TheDEFIac) November 23, 2022
The “Bad Debt” attack on Aave was like the situation that led to the collapse of FTX. The failed company issued held a huge amount of FTT, its native token. As the asset price fell, the Sam Bankman-Fried empire followed.
Unlike FTX, as many users have pointed out, everyone has access to on-chain information about Eisenberg’s transactions, the state of the protocol’s finances, and the amount of bad debt he held on his balance sheet. This transparency is a critical difference between centralized ecosystems and decentralized protocols. The team behind Aave established:
Most importantly, today’s events are in contrast to what we’ve seen with centralized entities in the space – transactions were completely traceable and auditable on-chain, providing transparency to users and the community.