In response to the recent price volatility on stablecoins, Aave has announced the freezing of stablecoins trading and set the Loan-to-Value (LTV) ratio to zero. This move follows an analysis from DeFi’s risk manager company Gauntlet, which recommended that all V2 and V3 markets be temporarily paused. The trading freeze is expected to help prevent insolvencies, which are projected to reach around 550k at current prices.
Aave Freezes Stablecoins Trading and Sets Loan-to-Value Ratio to Zero Amidst USDC Depegging and Rising Insolvencies
According to Aave’s governance forum, setting the LTV to zero will discount the “borrowing power” of the asset without affecting the HF of any user position. LTV is an essential metric determining how much credit an individual 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 the collateral.
Gauntlet’s risk analysis examined the number of insolvencies that might occur under different scenarios, considering that the price of USDC stabilizes, recovers, or declines significantly.
However, with USDC depegging on March 11, insolvencies have risen, leading to Aave’s decision to freeze trading and set the LTV to zero.
The move is expected to prevent further insolvencies and ensure that Aave remains a safe platform for investors. The freezing of trading and setting the LTV to zero will likely stay in place until stability returns to the market.
Centralized Crypto Exchanges Witness Surge in Trading Volume Following SVB Collapse
Digital assets data provider Kaiko has reported a surge in trading volume on centralized crypto exchanges following the Silicon Valley Bank (SVB) collapse on March 10. The collapse was triggered by the bank’s 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 Department of Financial Protection and Innovation shut down SVB on March 11, triggering a bank run.
Circle, the company behind the USDC, disclosed on March 11 that $3.3 billion of its $40 billion reserves were stuck at SVB, leading the primary stablecoin price to fall below its $1 peg and affecting many stablecoin ecosystems as a result. Despite reassurances on Crypto Twitter, most investors still sell USDC at a significant discount.
Conclusion
The recent price volatility on stablecoins has led to Aave’s decision to freeze trading and set the LTV to zero. This move is expected to prevent insolvencies and ensure that Aave remains a safe platform for investors. Meanwhile, the collapse of SVB has triggered a surge in trading volume on centralized crypto exchanges, leading to further instability in the market.
