#How Did Aave's Oracle Configuration Trigger Significant Liquidations?
A recent incident in Aave’s oracle system has caused liquidations amounting to approximately $26 million. This event arose when the protocol incorrectly priced wstETH about 2.85% lower than its actual exchange rate. As a result, many leveraged borrowers ended up with positions that appeared undercollateralized, which led to automatic liquidations.
Chaos Labs highlighted that this issue stemmed from a mismatch between the snapshot ratio and the snapshot timestamp in Aave’s CAPO oracle system. The system was designed to update the snapshot ratio, reflecting an exchange rate from seven days prior. However, an on-chain constraint limited any increases to 3% every three days, restricting how much the ratio could be updated while retaining the original timestamp.
This misalignment caused the CAPO formula to derive a maximum exchange rate that was lower than the existing market rate, thereby pushing the price down for the oracle. Throughout this episode, there were about 10,938 wstETH liquidated across 34 separate accounts. Third-party liquidators seized nearly 499 ETH in total profits from these actions, while Aave itself did not incur any bad debt.
#What Actions Did Aave Take to Address the Situation?
To rectify the situation, Aave took immediate steps, including reducing borrow caps, correcting the oracle’s configuration, and restoring the accurate exchange rate. Subsequently, around 141 ETH has been recovered through refunds issued by BuilderNet, along with approximately 13 ETH in liquidation fees. These funds are set to help compensate users adversely affected by the incident. The DAO treasury is prepared to cover any remaining shortfalls to ensure all affected users receive the necessary support.
This episode serves as a critical reminder of the complexities within decentralized finance systems and the importance of robust risk management practices.