Decentralised finance whales have pulled a whopping $1.7 billion worth of Ethereum from lending protocol Aave over the past week.
As a result, available liquidity has shrunk and temporarily sent the interest rate the protocol charges borrowers to more than 10%.
That’s good news for those lending out their Ethereum, who enjoyed a brief spike in the amount their deposits earned.
But for investors on the other side of the table it’s a different story.
Unwinding positions
Those engaged in looping, a strategy to juice their Ethereum staking yields by repeatedly depositing and borrowing from the market, suddenly started losing money.
They unwound their positions en masse, resulting in liquid staking providers needing to unstake Ethereum.
The queue to exit staking swelled to over 627,944 Ethereum, worth roughly $2.3 billion, on Wednesday, the highest it has ever been, according to data from beaconcha.in.
Ethereum borrowing rates have since almost returned to their pre-withdrawal levels.
But the episode showed how the actions of a few wealthy DeFi users can create ripple effects across the DeFi landscape.
Aave is the biggest lending protocol on Ethereum, with over $55 billion of deposits, per DefiLlama data.
Users can deposit assets, like Ethereum, and earn interest when other users borrow them.
Whale’s game
Most of the $1.7 billion in withdrawals can be attributed to a few entities.
Marc Zeller, an Aave contributor, told DL News he believed crypto billionaire Justin Sun was behind the majority of the Ethereum withdrawals. Zeller said that the Tron founder regularly moves large amounts in and out of the lending protocol.
“He’s just unpredictable,” Zeller said on Telegram. “He’s moving billions like I go grocery shopping.”
Wallets tagged by users as belonging to Sun on Arkham, a crypto data platform, withdrew more than $646 million worth of Ethereum from Aave over the past three days, onchain records show.
A wallet belonging to crypto exchange HTX also withdrew a net of $455 million worth of Ethereum from Aave over the past week.
Sun serves as an advisor to HTX and is a prominent figure in its public-facing activities, often promoting the platform and its initiatives.
‘He’s moving billions like I go grocery shopping.'
Marc Zeller
Wallets attributed to Sun by Arkham still hold another $80 million worth of Ethereum on Aave.
Sun did not immediately respond to a request for comment.
Several more entities also pulled smaller amounts of Ethereum from Aave, including Abraxas Capital Management, a London-based investment manager. It withdrew a net $115 million worth of the cryptocurrency over the past week.
Looping risks
The whale withdrawals of Ethereum from Aave shrunk the available supply of the asset on the platform. When this happens the protocol is designed to increase the interest rate charged to borrowers.
When the interest rate jumped it meant that looping strategies which depended on the interest rate for borrowing Ethereum staying low, reversed, and started losing investors’ money.
Those investors unwound their positions, queuing millions of dollars worth of Ethereum for withdrawal from the network’s staking contract via liquid staking providers, and creating the large backlog.
Only a certain amount of Ethereum can be unstaked at a time. It will take the network almost eleven days to unstake the backlog of 627,944 Ethereum, according to beaconcha.in.
While looping can be very profitable for those who do it, the practice is also fraught with risks.
In April last year, investors on Blast-based protocol Pac Finance were left reeling after a code change liquidated users looping staked Ethereum tokens, costing them $26 million.
Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at [email protected].
