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We’re back today with another takeover from the Blockworks Research analysts. Let’s unpack the subtle decisions made by risk curators that saved Aave from significant turmoil. Enjoy!

Market update

While declining volatility and variance has long been a persistent feature of crypto markets on a year-over-year-basis, Friday’s price action presented a counterfactual to this trend. The distribution in the tails were in fact fat, more so than many would have thought possible. As the long tail of returns can still be realized, unfortunately in this case it was to the downside, systems that can effectively manage this risk become increasingly important to continue to support growth in risk taking on these markets. 

While CEX performance was throttled, particularly for perpetual futures, several onchain systems proved resilient. Aave has grown into the preeminent money market for lending and borrowing activities, accounting for 60% market share in this category and over $75 billion in deposits and $30 billion in active loans prior to this event. The absolute value of this capital is enormous, and the risk management of it is paramount.

Friday’s selloff led to the liquidation of $193 million in loan value on Aave. Over 80% of this liquidated loan value was denominated in stablecoins. While the scale of this liquidation was significant, it was actually smaller than the values liquidated during August 2024 of $272 million and February 2025 of $204 million.

Aave was less impaired from this event given the fact that the long tail of most alts are not eligible collateral on the market, dissimilar from perps DEXs where these alts may compose a significant share of the platform’s open interest.

In addition, and perhaps most significantly, risk curators for Aave now long ago made a small but critical decision regarding the risk management of USDe within the system. The decision made was to hardcode the USDe price to match the USDT price within Aave’s risk management system. While the decision drew controversy as impairment of USDe’s reserves could lead to bad debt for lenders, it simultaneously protected borrowers from liquidations during tail events as exhibited on Friday, where the USDe price on Binance fell beneath $0.70. As the scale of sUSDe and USDe-type PTs grew into the billions in recent months, with much of this collateral borrowed against at very high LTVs, this subtle but critical risk management decision protected the platform from the billions in liquidation value that would have occurred otherwise during an event like Friday’s.

— Luke

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