Decentralized finance (DeFi) protocol Aave is freezing borrowing and lending of assets in its Ethereum liquidity pool after a vote by its community of token holders aimed at mitigating risk – and in preparation for upgrading its protocol.
The Ethereum liquidity pool is the largest on Aave, which has $5.6 billion in liquidity locked across six chains on the protocol. It will sunset trading on 17 assets, including curve (CRV), 1inch (1INCH), yearn finance (YFI) and several stablecoins.
The proposal, written by decentralized finance (DeFi) infrastructure company Gauntlet Network, is meant to avoid the risk of Aave accruing bad debt. It will help the protocol move from its version (v)2 to v3 version by giving users the option to migrate their assets to the upgraded network, according to the company.
Nick Cannon, vice president of growth at Gauntlet, told CoinDesk the proposal was also prompted by insolvency issues with the curve token. Aave held $1.5 million in bad debt after a trader borrowed 20 million CRV from Aave to crypto exchange OKX, shorting the coin and tanking its price.
Cannon said that while returning these tokens online is up to the Aave community, they will likely return to the protocol operable on its v3 chain. He also noted that these tokens comprise about 5% of Aave's total value locked (TVL).
Additionally, two separate additional proposals to pause borrowing on Uniswap and Chainlink passed on Sunday. Cannon noted that these tokens, a part of the Ethereum liquidity pool, were added to ensure the “robust tokens” were included in their effort to keep the assets safe.
The protocol has been slow and steady in its move to deploy more assets on its v3 network over the past year. In January, Aave founder Stani Kulechov said the protocol would begin to deploy its v3 upgrade across seven chains, including Ethereum.
On Monday, the Aave community voted in an off-chain poll to allow users to migrate 26 assets in the Ethereum liquidity pool to the v3 network.
Currently, the upgraded versions of Aave runs atop layer 1 blockchain networks Avalanche, Fantom, and Harmony, as well as Ethereum-based layer 2 networks Arbitrum, Polygon and Optimism.