AAVE is a decentralized trading protocol that has temporarily frozen the services for around 17 Ethereum-based tokens. The move has been taken to prevent losses from bad debts that can impact the stability of the decentralized protocol.
It is important to note that AAVE is one of the largest cryptocurrency lending platforms operating on the Ethereum network.
Thus far, AAVE has stored around $3.65 billion worth of cryptocurrency tokens spread across multiple chains. The decision to halt lending services for the said tokens is a temporary fix.
The AAVE 2.0 protocol has adopted this decision after conducting a community vote on the matter based on its governance members on the Gauntlet network.
The list of Ethereum tokens that are no longer available for lending on AAVE is Curve DAO, Enjin, 1inch, DeFi Pulse Index, RAI, GUSD, LUSD, xSushi, renFIL, Basic Attention Token, Decentraland, 0x, Ampleforth, Maker, sUSD, USDP, LUSD, and five stablecoins.
The users on AAVE are barred from depositing new tokens or lending them on account of risk concerns.
Uncertainty in the Crypto Sector due to FTX Collapse
Since the collapse of FTX, the cryptocurrency market has been under the black shadow with increasing FUD sources. The proposal issued by AAVE to tackle the matter has mentioned that it is an attempt to reduce the liquidity decline and reduce the chances of lapse among highly volatile currencies.
The AAVE protocol was recently hit by a bad debt slam of $1.6 million on account of shorting positions based on Curve DAO or CRV token.
A whale borrowed around 92 million CRV tokens from AAVE and sold the borrowed token, crashing the market price of CRV. However, the borrower had to suffer from losses on account of a short squeeze on CRV.
In an attempt to maintain the liquidity for the shorted token of CRV, AAVE had to suffer from $1.6 million in bad debts. The management of AAVE has maintained that it has enough liquidity to cover up. It has taken the new step of banning around 17 Ethereum-based tokens mentioned above for any new deposits or lending contracts.