Lending protocol Aave has frozen stablecoin transactions and set loan-to-value ratio (LTV) to zero in response to recent price volatility of stablecoins after USDC, Decoupling on March 11.
According to Aave’s governance forum, the trade freeze follows an analysis by DeFi risk management firm Gauntlet recommending a temporary suspension of all V2 and V3 markets.
“Setting LTV to 0 certainly helps everywhere, but on Avalanche v3 pools, Aave Guardian can act immediately given that the cross-chain infrastructure does not cover Avalanche. Setting LTV to 0 in practice discounts assets” Borrowing ability” without compromising the HF of any user’s location,” noted one participant in the forum discussion.
LTV is an important metric that determines how much credit you can get using cryptocurrencies as collateral. Expressed as a percentage, the ratio is calculated by dividing the amount of credit borrowed by the value of the collateral.
Gauntlet’s risk analysis examines the number of bankruptcies that could occur under different scenarios, considering USDC’s price stabilization, recovery, or sharp decline: “V3 emode assumed correlations for stablecoin assets, but at this point, those correlations have diverged. Given the liquidation bonus of only 1% for USDC on emode, the risk is increased. To account for these assumptions that no longer hold, we recommend pausing Market. [...] At current prices, bankruptcy is about 550,000. These may change depending on price trajectory and further decoupling.”
Trading volumes on centralized cryptocurrency exchanges have surged in the past few hours following the collapse of Silicon Valley Bank (SVB) on March 10, according to digital asset data provider Kaiko. Silicon Valley Bank was shut down by the California Department of Financial Protection and Innovation on March 11 after the bank's latest financial report showed that the bank sold a large number of securities worth $21 billion at the time of the sale, resulting in a loss of about $1.8 billion. California regulators also designated the Federal Deposit Insurance Corporation (FDIC) as a receiver to protect insured deposits.
Circle, the company behind USDC, disclosed on March 11 that $3.3 billion of its $40 billion in reserves was stranded in SBV, causing the price of the main stablecoin to drop below the $1 peg and consequently impacting much of the stablecoin ecosystem.
