Oracle malfunction or oracle manipulation? This time, it was not a hack attempt; it was a malfunction. DeFi lending protocol Aave experienced an oracle malfunction, resulting in an incorrect liquidation of $21 million in wstETH (Wrapped Staked Ether).
How can oracle pricing error on Aave cause $21 million worth of liquidation?
Aave faced a temporary oracle malfunction that caused several collateral assets of borrowers’ positions to be liquidated. Oracle used by Aave mispriced the collateral used in loans. Oracles are used to fetch external data or feed prices to know the value of assets/collateral.
In Aave’s case, something unusual happened. Imagine a system that is supposed to prevent risk becoming the origin of the risk itself? Capped Price Oracle (CAPO), a risk-management mechanism used by Aave, helps to protect the protocol from oracle manipulations, extreme market volatility, and flash-loan price spikes.
Generally, if the oracle feeds a higher price, Aave’s CAPO limits the price to a lower value.
CAPAO misinterprets the price, resulting in chaos
However, the CAPO set a very low price for wstETH than expected, undervaluing the collateral. Smart contracts, as typical, read asset prices from oracles, analyze the value of a user’s collateral, check if the user’s loan is safe, and eventually automate liquidation.
In this specific incident, the smart contract read that the value of the borrower’s collateral was much less than it actually was, only because CAPO priced it very low.
In the next phase, Aave’s automatic smart contract triggered unfair liquidation, liquidating over $21 million worth of collateral, which is equal to 10,938 wstETH.
Now talking about liquidation, lenders are those who distribute assets to a lending pool. Borrowers take loans from the pool equal to their collateral. If the value of collateral dips too much, Aave protects lenders by liquidating the loan. During this liquidation, the total collateral liquidated accounted for $21 million.
Oracle malfunction hits AAVE, liquidating over $21 million worth of wstETH
Oracle malfunction or oracle manipulation? This time, it was not a hack attempt; it was a malfunction. DeFi lending protocol Aave experienced an oracle malfunction, resulting in an incorrect liquidation of $21 million in wstETH (Wrapped Staked Ether).
How can oracle pricing error on Aave cause $21 million worth of liquidation?
Aave faced a temporary oracle malfunction that caused several collateral assets of borrowers’ positions to be liquidated. Oracle used by Aave mispriced the collateral used in loans. Oracles are used to fetch external data or feed prices to know the value of assets/collateral.
In Aave’s case, something unusual happened. Imagine a system that is supposed to prevent risk becoming the origin of the risk itself? Capped Price Oracle (CAPO), a risk-management mechanism used by Aave, helps to protect the protocol from oracle manipulations, extreme market volatility, and flash-loan price spikes.
Generally, if the oracle feeds a higher price, Aave’s CAPO limits the price to a lower value.
CAPO misinterprets the price, resulting in chaos
However, the CAPO set a very low price for wstETH than expected, undervaluing the collateral. Smart contracts, as typical, read asset prices from oracles, analyze the value of a user’s collateral, check if the user’s loan is safe, and eventually automate liquidation.
In this specific incident, the smart contract read that the value of the borrower’s collateral was much less than it actually was, only because CAPO priced it very low.
In the next phase, Aave’s automatic smart contract triggered unfair liquidation, liquidating over $21 million worth of collateral, which is equal to 10,938 wstETH.
Now talking about liquidation, lenders are those who distribute assets to a lending pool. Borrowers take loans from the pool equal to their collateral. If the value of collateral dips too much, Aave protects lenders by liquidating the loan. During this liquidation, the total collateral liquidated accounted for $21 million.
However, there was no bad debt for Aave, as liquidators successfully repaid the loans, and received some amount worth of collateral as mentioned above. Liquidators refer to traders or bots that check risky loans and repay part of the borrower’s debt, and receives borrower’s collateral at discounts.
Oracle malfunction is not a new incident in DeFi
In DeFi’s history, oracle malfunction and manipulation incidents are many. In 2021, an oracle fed the price late, misreporting the value of the USDT stablecoin. This resulted in small-scale unfair liquidations.
In another incident, the oracle of Saddle Finance, a decentralized automated market maker, fetched the wrong price on wstETH, forcing users to withdraw the collateral they deposited.
