Aave, a DeFi lending protocol, has frozen stablecoin trading and set the loan-to-value (LTV) ratio to zero in response to recent stablecoin price volatility after USD Coin (USDC) lost its peg with the dollar on March 11.
According to the Aave governance forum, the trading freeze follows an analysis by DeFi risk manager Gauntlet, which recommended a temporary pause for all V2 and V3 markets.
“Setting LTV to 0 definitely helps everywhere, but in the Avalanche v3 pool, since the cross-chain infrastructure doesn’t cover Avalanche, the Aave Guardian can act immediately. In practice, setting the LTV to 0 reduces the “capacity of indebtedness” of the asset, without affecting the HF of any user position,” said a participant in the forum discussion.
The loan-to-value (LTV) ratio is an important metric that determines the amount of credit that can be obtained using cryptocurrencies as collateral. Expressed as a percentage, the ratio is calculated by dividing the amount of the credit provided by the value of the guarantee.
Gauntlet’s risk analysis examined the number of defaults that could occur under different scenarios, assuming the USDC price stabilizes, recovers, or declines significantly:
“V3 emode assumes the correlation of stablecoin assets, but at this time, those correlations have diverged. The risk has increased given that the liquidation bonus is only 1% for USDC in emode. To account for these assumptions we no longer are true, we recommend taking a break from the markets. […] At current prices, bad debts are ~550,000. This may change based on price trajectory and further parity losses.”
Centralized cryptocurrency exchanges have seen increased trading volume in the past few hours following the failure of Silicon Valley Bank (SVB) on March 10, according to digital asset data provider Kaiko.
Two big $USDC markets on exchanges seeing heavy sell pressure and huge volumes in last 24 hours
Despite plenty of reassurance on crypto twitter, most investors still selling USDC at a big discount pic.twitter.com/W9uy2HHax4
— Conor Ryder (@ConorRyder) March 11, 2023
On March 11, the California Department of Financial Protection and Innovation closed Silicon Valley Bank following a bank run triggered by the bank’s latest financial reports, which showed it had sold a large amount of securities worth $21 billion at the time. of the sale, with losses of some USD 1,800 million. The watchdog also appointed the Federal Deposit Insurance Corporation (FDIC) as receiver to protect insured deposits.
Circle, the company behind the USDC stablecoin, revealed on March 11 that $3.3 billion of its $40 billion reserves were being held in SBV, causing the stablecoin’s price to fall below its USD peg. 1 and affected many stablecoin ecosystems as a result.
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