Until last week, Aave was consistently ranked as the top crypto borrowing and lending platform in terms of "total value locked" – the amount of crypto assets reportedly locked into the platform. But October 29, 2021, a single user withdrew $4.2 billion in crypto assets from Aave, causing lending and borrowing interest rates to spike, and their total crypto locked to plummet ~18% in a matter of hours. The event raises questions about whether other platforms are similarly dependent on very wealthy users, and what sorts of volatility may follow should those users decide to remove their crypto assets.
Blockworks documented the wild spike in borrowing rates the withdrawal caused:
In the wake of the withdrawal, stablecoins — particularly USDT — were in short supply, and both utilization rates and, consequently, the yields being charged borrowers skyrocketed. For several hours, the cost to borrow USDT on Aave’s V2 Ethereum market was between 60-80% annualized...
Collectively these funds represented about 18% of the protocol’s Total Value Locked (TVL), which now stands at $15.2 billion according to DefiLlama. As a result, Aave has fallen to number three in the TVL rankings behind Curve Finance and MakerDAO.
Reporting indicates that Justin Sun was behind the withdrawals. Sun is the founder of the cryptocurrency Tron, and a partial-owner of the crypto exchange Poloniex. Collin Wu, author of China Crypto News, tweeted a link to the crypto wallet address associated with Sun, showing multiple withdrawals from Aave totaling over $4.2 billion, including:
- Over $2 billion worth of wrapped Ether (WETH) - 490,00 WETH total
- $1.247 billion worth of the stablecoin USDC (These were split across multiple transactions, including three transactions of $200 million each, two for ~$50 million, and one for $100 million)
- $686 million of wrapped Bitcoin (WBTC)
- $190 million of the stablecoin Tether; and
- $45 million of the stablecoin TrueUSD (TUSD)
The wallet associated with Sun has continued withdrawling from Aave in recent days, including removing 40 million USDC on November 1 and 20,000 ETH [worth some $86.5 million at the time] on November 1
Aave fell from having $19.29 billion in crypto assets locked in smart contracts on the platform to $15.06 billion in a single day (down nearly 22%), and fell further through November 1 to $13.55 billion (down 30% from October 28th) according to data from DeFi Llama.
Aave only displays interest rates from a 24-hour period, and thus doesn't capture the true range of volatility experienced by its interest rates on October 29 following Sun's withdrawals. But even in the daily chart Aave does provide shows how disruptive Sun's withdrawals were to its interest rates:
Sun's $4.2 billion withdrawals from Aave came in the wake of a massive attack on the Cream Finance lending platform. Cream Finance lost $130 million in crypto assets on October 27th. The hacker used flash loans – which are unsecured loans where capital is borrowed and repaid in a single transaction – to steal the funds.
Rekt News reported:
The hacker was able to take advantage of a pricing vulnerability by repeatedly lending and borrowing flash-loaned funds across two addresses.
Many speculated that Sun may have pulled funds from Aave due to concerns that it was vulnerable to the same exploit used in the Cream Finance attack, including the founder of the competing Yearn protocol, who tweeted that "Aave was vulnerable to the same exploit." Aave acknowledged these concerns in a tweet:
Regardless of the reasons behind Sun's withdrawals, it raises questions about how much of the crypto ecosystem is held by very large traders, investors, and crypto founders. These questions aren't limited to the percentage of value locked in lending platforms held by major whales. It also extends to the concentration of holdings of certain crypto tokens by large holders.
For example, according to metrics provider glassnode, over 96% of Uniswap's governance token UNI is held by the top 1% of addresses. (Note: Glassnode excludes "Exchange addresses, smart contract addresses, and other special asset-specific addresses (e.g. team fund addresses)" from these metrics)
Over 98% of the Compound platform's governance token COMP is held by the top 1% of addresses. This is also true for major stablecoins – nearly 92% of USDC and nearly 93% of Tether are held by Top 1% addresses, as of November 4, 2021.