A crypto trader recently suffered a massive loss after attempting to buy AAVE tokens with 50 million USDT through the Aave interface.
Instead of receiving a vast quantity of tokens that was expected, the user received only 324 AAVE, which led to a wide range of discussions among users of cryptocurrency regarding the risks involved in large decentralized finance trades.
After this, Stani Kulechov, Founder and CEO of Aave, announced that they are trying to contact the trader and are willing to refund $600,000 in fees that were generated during this transaction.
Though the protocol performed correctly, Stani Kulechov announced that they are considering various measures that could be implemented in order to avoid situations like this in the future.
What exactly happened?
Initially, it was suspected that the loss resulted from slippage. Slippage is a situation that occurs when the actual execution price differs from the expected price due to market volatility. However, Aave explained that it wasn’t the case.
Instead, the problem came from the trader accepting a quote that already showed an extremely high price impact, close to 99 percent.
Price impact occurs when a very large order moves the market price of an asset because there isn’t enough liquidity available at the current price.
Was it really the user’s fault?
According to Aave, the trading interface had already warned the user before the transaction was confirmed. The system displayed an estimated exchange rate showing that less than 140 AAVE would likely be received in return for the 50 million USDT. It also provided a clear warning regarding the unusually high price impact.
Nonetheless, the user chose to go ahead with the trade despite the above alerts. The trade was executed via CoW Swap, which is designed to find the best possible execution based on various sources of liquidity. The developers stated that the swap was executed precisely as desired based on the parameters that were accepted by the user.
The protocol executed correctly in this case, but it is apparent that users need to be cautious when executing extremely large trades in DeFi protocols, given that these are not safeguarded against in traditional financial systems.