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AAVE, the leading decentralized non-custodial liquidity protocol that allows users to lend and borrow cryptocurrencies without intermediaries, has introduced a safeguard for platform users that blocks any swap with a price impact greater than 25%. The new protection feature does not compromise permissionless operations for advanced users and is described as yet another layer of protection to prevent accidental confirmations. AAVE emphasizes that its core building philosophy centers on permissionless finance and aims to balance permissionless operations with protecting users from mistakes.
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“AAVE Shield creates a high friction guardrail for users, requiring them to have to manually visit the Settings menu and intentionally disable the AAVE Shield protection in order to proceed with a high-risk trade.” This guardrail seeks to prevent inadvertent high-risk actions while preserving the ability to trade in volatile market conditions. Permissionless operations can be critically important in times of market stress, and there are occasions when users need to execute swaps at any slippage or price impact, underscoring the need for thoughtful safeguards that do not unduly constrain advanced users.
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AAVE also took the opportunity to highlight a misconception regarding the incident saying that it occurred as a result of an illiquid market and not due to slippage. “It is critical to distinguish between price impact due to an illiquid market and price impact due to slippage. An illiquid market is one where there is not enough available supply of an asset at a given price to fill a large order without significantly worsening the price.” A large order in an illiquid market will have a high price impact.
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Slippage is the margin the user accepts for a given market price to allow the platform to fill the order as fast as possible, which will usually involve a “surplus” for the value not needed. In this incident, the issue was an illiquid market rather than slippage. The user was quoted a price that was already 99.9% below expected market clearing value for the underlying assets of AEthUSDT and AEthAAVE due to the trade’s disproportionately large size relative to available liquidity.
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The unfavorable outcome was a result of the confirmed quote, not a change in price during execution. The $50 million swap loss has caused industry backlash with some saying the recent AAVE safeguards are still not enough. “This solution is still not perfect. In extreme cases, users should be required to manually enter a piece of text instead of simply clicking a checkbox. This is a very common practice, and I hope it can be added.”
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“Why not fill the swap through DEX once the LP can’t fulfill the entire request? It’s like the user wants to buy $100 worth of AAVE and the LP only have 1 token left, so they priced it at $100 each just to fulfill the request.. that is kinda lazy and unfair solution to make sure that all transactions will push through.” “The most impressive part of this post-mortem is your incredible generosity! You’re really refunding the $110k interface fee out of the $50M the guy lost? Wow. That’s like totaling someone’s car and handing them a pine air freshener as compensation.” “This is the real lesson: size without liquidity depth is not conviction, it’s exposure. The protocol wasn’t hacked. The market just showed what happens when order size overwhelms available exit liquidity.”
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