Loan backed by 2.3% of AAVE supply hit by cascading liquidations as token slides

A significant liquidation event recently rattled the Aave decentralized lending protocol, triggered by a sharp decline in the AAVE token’s market price. The high-profile position, collateralized by roughly 2.3% of the entire circulating supply of AAVE, faced rapid and extensive liquidations totaling millions of dollars, highlighting the stress points in large, concentrated DeFi positions.

The crisis began when the AAVE token dipped sharply amidst broader market volatility, pushing the borrower’s health factor below the critical 1.0 threshold. The size of the collateral meant that the automatic forced sales by liquidators dumped substantial amounts of AAVE onto the market instantaneously. This intense selling pressure exacerbated the token’s price slide, creating a cascading liquidation loop—where the liquidations themselves drove the price down further, triggering subsequent rounds of sales to cover the outstanding debt.

Market analysts noted that while the event caused immediate price volatility and market panic, the Aave V2/V3 protocol performed as designed. The liquidation mechanism successfully neutralized the risk to the protocol by clearing the outstanding debt, ensuring the platform’s solvency and protecting lenders. However, the incident serves as a powerful reminder of the systemic risk posed by single large ‘whale’ positions and the inherent volatility associated with using core governance tokens as primary collateral in decentralized lending markets.

Source: Loan backed by 2.3% of AAVE supply hit by cascading liquidations as token slides