Aave’s USDT pool hits 92.8% utilization after $115M whale withdrawal

One whale took out $114.9M from Aave, taking most of the liquidity in its USDT vault. The loan increased the vault utilization to 92.83%, breaking above the preferred limit of 92%.

The whale’s outsized loan broke the balance of vault utilization on Aave, above the maximum threshold of 92%, showing the potential fragility of DeFi lending and threatening to block the funds of lenders.

Crypto lending has grown in the past year, becoming one of the main sources of yield. Lending protocols competed on their yield, and the top platforms were usually conservative.

Aave remained solvent and had normal loan utilization until now. A single whale went over the threshold with the outsized loan. The whale now holds over $115M in USDT, along with $5M in other assets.

For DeFi lending, one of the fears is that user funds are redirected in a non-transparent way to other protocols.

With over 69B locked in lending, there are fears that decentralized protocols may have the same effect as the FTX exchange. This time, however, lenders will have no recourse for recovery from a single legal entity.

Is Aave in danger of over-utilization?

Over-utilization has become a problem for smaller protocols with riskier vaults. Recent data shows smaller protocols have extremely high utilization, with some choosing forced liquidations.

The recent aggressive borrowing means the lending pools do not see any repayments. The liquidity providers also cannot withdraw their funds, despite the promised high returns. I

n a recent example of over-borrowing, two vaults on Lista DAO were force-liquidated after reaching 99% utilization with no repayments. The vaults used collateral in the form of a risky stablecoin and lent out more liquid assets.

Utilization in DeFi refers to the percentage of funds borrowed from a protocol. As of November, there are warnings to check the utilization of pools before depositing liquidity. Some protocols have increased their utilization to 92%.

The other problem is the loan collateral, which may also depreciate, leaving lenders with the losses. Currently, Aave holds over $32B in total value locked, and has $21.7B in loans outstanding. As a whole, the protocol holds sufficient collateral, but some vaults may turn less liquid.

On the positive side, over-utilized vaults cannot create contagion. Yet protocols may put limitations on to avoid overly-aggressive borrowing.

The expansion of collateral may lead to attempts to over-utilize lending pools, thus essentially leaving the lenders to absorb the losses or claim the collateral. Borrowers still have the advantage of having a more liquid stablecoin portfolio.

AAVE falls to a one-month low

Aave remains the seventh-largest protocol for daily fee production, with a dedicated program to re-buy AAVE tokens.

In September and October, Aave fees moved to a higher baseline of over $3M daily, adding to the reserves of the protocol.

At the same time, the AAVE token sank by around 30%. AAVE traded at around $194 after the latest round of losses. AAVE has also not found support from the promised buybacks as a form of revenue sharing.