Aave wstETH glitch forces $27M in liquidations and compensation

Capo, an external oracle solution used by Aave, triggered around $27 million in liquidations after a pricing glitch, but the lending platform said it is stepping in to cover the losses.

A configuration error in a risk-oracle system used by crypto lending platform Aave triggered the liquidation of about $27 million in wrapped staked Ether (wstETH) positions, prompting the protocol to move to compensate affected users.

In a post-mortem published Tuesday, Aave said about 10,938 wstETH worth around $27.1 million was liquidated after the protocol applied an exchange rate that was 2.85% below the live market rate for wstETH and Lido staked Ether.

The issue stemmed from a mismatch between pricing parameters and timestamp data in the oracle configuration, which caused the system to calculate a maximum allowed exchange rate below the actual rate onchain.

Aave said the incident did not create any bad debt for the protocol, but liquidators captured about 499 Ether (ETH) in bonuses and value tied to the pricing deviation.

Chaos Risk Oracles is an external tool used within Aave, which processed over 1,200 payloads and 3,000 parameters without issues, said Aave founder and CEO, Stani Kulechov, in a Wednesday X post.

“A technical misconfiguration resulted in the liquidation of positions that were already close to their liquidation thresholds,” Kulechov said, adding that the “configuration issue has already been remediated.”

He said the Aave protocol incurred no bad debt, and that a total of 345 Ether ($700,000) went to liquidators as an excess liquidation windfall.

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Aave said it recaptured 141 ETH ($285,000) in liquidation bonus revenue through BuilderNet refunds and another 13 ETH in liquidation fees, which will be used to compensate impacted users who were liquidated due to the incident. DAO treasury funds will be used to cover any shortfall.

The incident adds to broader scrutiny of collateral pricing and oracle-related risk controls across decentralized finance lending markets. In late February, attackers drained roughly $10 million from a YieldBlox DAO-managed lending pool built on the Blend protocol through a price manipulation attack.

Related: Aave proposal clears first hurdle with 52.6% support amid governance split

The liquidation event also comes during a period of tension inside the Aave ecosystem following the Aave Chan Initiative’s decision earlier this month not to renew its engagement with the DAO.

The ACI cited concerns over governance standards and voting dynamics during the proposal process. In response to the governance dispute, Kulechov said that DAOs need to rethink the weight of the token holders’ votes versus input from leaders.

Kulechov argued that token holders shouldn’t vote on everything, as running blockchain protocols requires a team and leaders, not thousands of votes that may lead to politicized or inefficient governance efforts.

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Source: CoinTelegraph