Aave passes market turbulence with flying colors and more fees revenue

Aave, the leading lending protocol, passed the recent market turbulence with limited problems. The recent slide of Ethereum under $2,200 caused limited liquidations, and in fact Aave benefitted from extra fees. 

One of the concerns for market turbulence are liquidations in DeFi, affecting loan protocols. Aave still went through record liquidations, reaching $237M on August 5. This brings Aave liquidations to $441M. During the August 5 crash, Aave survived its biggest stress-test, while centralized markets liquidated more than $1B. 

In the aftermath of the crash, Aave still carries more than $10.8B in value locked. Personal loans on Aave are always over-collateralized, but some personal loans were affected. Most of the collateral is WETH, while the loans liquidated are for USDT and USDC. At the same time, GHO, the Aave native stablecoin, still held its $1 level.

The protocol even benefitted from the turbulence, by printing $6M in revenues in a single day. Aave continued with much smaller liquidations on August 6, with a limited number of wallets threatened by liquidations. 

The big fears for Aave and DeFi in general is that a price crash would lead to liquidations across the board and contagion. However, the ecosystems have so far limited the damage only to personal wallet risk. 

The latest price crash was the deepest since the fall of FTX in 2022, and the markets were much better prepared to absorb it. Crypto remains risky for individual users at certain price levels, but at the protocol level, DeFi remains viable. 

Traders have noted that liquidity providers on Aave have not been harmed, and the protocol has not caused contagion. Previously, centralized lending protocols like Celsius caused cross-contagion, while adding to the panic due to locking up withdrawals. DeFi has no power to stop withdrawals, as long as the smart contract conditions are met. 

The only way Aave can spread contagion is through its GHO stablecoin. GHO has been adopted by Balancer, Maverick, and Curve. GHO is usually used for yield farming, while being generated through Aave V3 on Ethereum. The stablecoin is over-collateralized, and offers quick generation and burn access. The recent market sell-off was the first big stress test for GHO, causing no bad debt or contagion to liquidity pools.

Liquidators gain additional fees

The latest market volatility episode granted liquidators $1.68M in liquidation bonuses. The top liquidator handled loans of $7.89M, making up around 25% of the latest liquidations. 

Liquidators on Aave have a key role in containing the risk spread. They target wallets that are close to liquidation levels on their collateral, then buy up their collateral at a discount, while also receiving liquidator fees. 

Liquidators had the most active day on the Ethereum V3 lending hub. Liquidators received more than $11.86M in bonuses, on a total of 2,250 liquidations . Arbitrum and Optimism also added smaller liquidator bonuses. Aave showed almost no activity on its Polygon and Avalanche versions. 

The recent performance of Aave also revealed the busiest networks, with Ethereum still taking the lead. Temporary market conditions raised average transaction fees to $44, due to the need to perform all liquidations on-chain . 

Aave V3 now dominates in terms of deposits, and receives an inflow of new active wallets from all chains. However, the Ethereum-based V3 is still the most liquid. Aave V3 brought 42,652 unique active users , with an inflow of new wallets from the Base blockchain.

AAVE holds above $100

The recent market shakedown made AAVE slide to lows of $77. After that, the protocol’s native token rallied once again above $100 .  AAVE is relatively undervalued, at least compared to outstanding loans and total value locked. It’s still just barely in the top 50 coins, and has most of its tokens in circulation. The Aave protocol also carries more value than MakerDAO, which only locks in $4.66B . 

After the recovery of ETH, Aave also benefits from having only a handful of small wallets at risk. Those wallets are at risk for ETH prices under $2,500 and Tuesday’s market recovery saw ETH rally to $2,577.55.

Cryptopolitan reporting by Hristina Vasileva