Ethereum-based decentralized finance (DeFi) protocol Aave has suffered an attack led by Avraham Eisenberg. The man in question was behind a sophisticated attack on Mango Markets. Fleeing is what some call an attack, while others call it a clever strategy.
Aave (AAVE) is trading at $57, down 7% in the past 24 hours and 36% in the previous week. Curve Finance’s native token, CRV, was also part of the attack. The token has seen significant selling pressure in the short-term, but has been trending upwards during today’s trading session.
First attempt at planning an attack on Aave?
Rudy Kadoch, founder of portfolio management project Nested, Summarize Yesterday’s events and the “bad debt” attack on Aave. According to the report, Eisenberg borrowed $83 million in CRV on the decentralized finance platform and used $50 million in the stablecoin USDC as collateral.
Eisenberg published a paper supporting the strategy in October 2022 via his Twitter account. It’s public and his goal is perfectly outlined: use his initial capital to influence the price of illiquid tokens, such as CRV or Ravencoin (RVN), in the hope of creating “bad debts,” excess liabilities assumed by the protocol .
— Messari (@MessariCrypto) November 22, 2022
To repay this debt, Aave will trigger an auction mechanism that involves selling AAVE on the spot market. By shorting the token, Eisenberg stands to benefit.
I’ve been told aave is perfectly safe, so that’s a potential trading strategy.Not financial or legal advice, but feel free to send a tip if you do make 9 figures
Note that starting with more initial capital increases the odds of success and percentage of profit pic.twitter.com/HKAF7Y5ogM
— Abraham Eisenberg (@avi_eisen) October 19, 2022
By tipping the price of the underlying collateral, Aave borrowers can “at least” double or quintuple their price. As Kadoch pointed out, the attack was unsuccessful due to lack of funds. Actors attempt to liquidate CRV whales to create bad debts.
However, as the attack progressed, the team behind Curve Finance published a white paper for the stablecoin crvUSD. The announcement supported the price of the coin and changed the trend. Cardocci pointed out:
– $sdCRV, $cvxCRV, $yCRV unpegged at over 10% discount to get back $CRV.
– People pay over 200% fees to borrow $CRV.
– When the system is prepared for such an event, people tell Aave it is not safe.
Aave’s future at stake?
On the other hand, the protocol functions as expected without centralized intervention. The team behind Aave stated that they will be discussing the recent events with the community and the DAO.
In this sense, the protocol may introduce changes in the coming days to mitigate “long-tail asset risk.” Many believed that once Eisenberg was able to marshal more funds, he would continue his assault on the protocol.
You could call it an attack on AAVE, but I actually think they made a mistake by not enforcing a hard cap on how much CRV/other illiquid coins you can use as collateral on AAVE. Otherwise, you run into problems similar to FTT.
— DeFiac (@TheDEFIac) November 23, 2022
The “bad debt” attack on Aave is like the situation that brought down FTX. Companies with failed launches hold large amounts of FTT, their native token. When asset prices plummeted, Sam Bankman-Fried’s empire followed.
As many users pointed out, unlike FTX, everyone has access to on-chain information about Eisenberg transactions, the financial health of the protocol, and the amount of bad debt held on the balance sheet. This transparency is a key difference between centralized ecosystems and decentralized protocols. The team behind Aave statement:
Most importantly, today’s events stand in stark contrast to the centralized entities we’ve seen in the space — transactions are fully traceable and auditable on-chain, providing transparency to users and the community.