Aave freezes stablecoin trading on Avalanche V3 as activity surges on CEXs

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Lending protocol Aave has frozen stablecoins trading and set Loan-to-Value (LTV) ratio to zero in response to recent price volatility on stablecoins after the USD Coin (USDC) depegged on March 11. 

According to the Aave’s governance forum, the trading freeze follows an analysis from DeFi’s risk manager company Gauntlet, recommending that all V2 and V3 markets should be temporarily paused.

“Setting LTV to 0 definitely helps everywhere, but on the Avalanche v3 Pool, given that cross-chain infrastructure doesn’t cover Avalanche, the Aave Guardian can act immediately. Setting LTV to 0 in practise discounts the “borrowing power” of the asset, without affecting the HF of any user position,” noted one participant in the forum discussion. 

LTV is an important metric that determines how much credit you can secure using crypto as collateral. Expressed as a percentage, the ratio is calculated by dividing the amount of credit borrowed by the value of collateral.

Gauntlet’s risk analysis examined the amount of insolvencies that might occur under different scenarios, considering that the price of USDC stabilizes, recovers, or declines significantly:

“V3 emode assumes 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 on emode. To account for these assumptions that no longer remain true, we recommend pausing the markets. […] At current prices, insolvencies are ~550k. These can change depending on the price trajectory and further depegs.”

Screenshot – USD balances by protocol and Assets by symbol and protocol. Source Gauntlet Network

Centralized crypto exchanges have seen a surge in trading volume in the past hours following the Silicon Valley Bank (SVB) collapse on March 10, according to digital assets data provider Kaiko.

Silicon Valley Bank was shut down by the California Department of Financial Protection and Innovation on March 11 after bank run triggered by the banks latest financial reports showing it had sold a large chunk of securities worth $21 billion at the time of sale, at a loss of about $1.8 billion. The California watchdog also appointed the Federal Deposit Insurance Corporation (FDIC) as the receiver to protect insured deposits.

Circle, the company behind the USDC, disclosed on March 11 that $3.3 billion of its $40 billion reserves were stuck at SBV, leading the major stablecoin price to fall below its $1 peg and affecting many stablecoin ecosystems as a result.