AAVE members voted in favor of freezing Ethereum assets as security concerns loom over

Aave community upvoted in favor of freezing ETH assets on Monday, November 28, 2022. The platform’s version 3 launch is on the anvil and keeping the liquidity pool active could pose a potential security threat to the assets according to the community members. Aave (AAVE) has the highest liquidity accounting to $5.6 billion across multiple chains. The platform will put a hard stop on assets including Curve (CRV), 1inch (1INCH), Yearn Finance (YFI) and several stablecoins.

The freezing of assets came into light when the Mango Hacker attempted to hack Aave and left the platform with $1.6 million in bad debt. The same incident happened on the Solana blockchain last month. Surprisingly, the hacker did not commit any fraud nor did he find a loophole in the system. Eisenberg made changes to the project’s code which resulted in huge losses for both Aave and Solana blockchains. After he acquired CURVE tokens from Aave he simply swapped it for USDC – a stablecoin and repeated the borrowing and swapping cycle. 

The proposal to freeze assets on Aave was prepared by Gauntlet Network – a platform that devises solutions for tail risks, attack vectors, and exploits on DAO, L1 and L2. The proposal was drafted and implied for Aave to not fall prey to bad debt. According to the proposal, the freeze will allow existing asset holders to migrate their assets from version 2 to version 3 of the network seamlessly. 

Recent events have revealed misalignment within the @AaveAave community relating to risk

There are two paths forward: https://t.co/UKSL7ShwO4

— Gauntlet (@gauntletnetwork) November 24, 2022

Nick Cannon, VP of Gauntlet Network, the proposal was laid also because of concerns around insolvency duress on the Curve (CURVE) token. According to sources, Aave held $15 million in bad debt after a trader maliciously borrowed Curve tokens and shorted it on OKX exchange. According to Cannon, it’s going to be a while before CURVE is back on Aave for the community. It is likely to be back on v3 of Aave. The trader had brought CURVE worth $ 20 million and after shorting the token, the value of the asset tanked. The TVL of CURVE is approximately 5%. 

In addition to this, two more proposals were passed last Sunday to pause borrowings on Uniswap (UNI) and Chainlink (LINK). Cannon added that these tokens are ‘robust’ in the Ethereum ecosystem and needed a security protocol given the network upgrade was ahead of it. 

The protocol has been continuously developing and adding more tokens to its asset pool. The version 3 of Aave will deploy more assets. In January, Stani Kulechov, founder of Aave said that the v3 will have more assets across seven chains including the leading blockchain Ethereum.

On Monday November 28, 2022 the community had an off chain vote to freeze the Ethereum pool assets and to let users migrate 26 assets to the upcoming version of the protocol. Currently, the upgraded version of Aave is running on top of layer 1 networks including Avalanche, Fantom, and Harmony. It also includes Ethereum-based layer 2 networks Arbitrum, Polygon and Optimism.  

Read more: Polygon vs Arbitrum vs Optimism

What will Aave do to restore the lost liquidity?  

Aave’s Safety Module is designed to use in case of a theft scenario like this. The platform will also use its DAO treasury to reinstate the liquidity back. 

Source: CoinDesk, Decrypt