Short Squeeze in DeFi Lending Market: Decentralization in Jeopardy?

Lioba Heimbach, Eric G. Schertenleib and Roger Wattenhofer

Papers from arXiv.org

Abstract: Anxiety levels in the Aave community spiked in November 2022 as Avi Eisenberg performed an attack on Aave. Eisenberg attempted to short the CRV token by using funds borrowed on the protocol to artificially deflate the value of CRV. While the attack was ultimately unsuccessful, it left the Aave community scared and even raised question marks regarding the feasibility of large lending platforms under decentralized governance. In this work, we analyze Avi Eisenberg's actions and show how he was able to artificially lower the price of CRV by selling large quantities of borrowed CRV for stablecoins on both decentralized and centralized exchanges. Despite the failure of his attack, it still led to irretrievable debt worth more than 1.5 Mio USD at the time and, thereby, quadrupled the protocol's irretrievable debt. Furthermore, we highlight that his attack was enabled by the vast proportion of CRV available to borrow as well as Aave's lending protocol design hindering rapid intervention. We stress Eisenberg's attack exposes a predicament of large DeFi lending protocols: limit the scope or compromise on 'decentralization'.

Date: 2023-02, Revised 2023-06
New Economics Papers: this item is included in nep-ban, nep-fmk, nep-his and nep-pay
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