The Balancer Protocol has attributed the decline of its native BAL token to an external market event involving mass liquidations on the DeFi lending platforms Aave and Venus.
Balancer announced on X“We observed significant liquidations of large BAL positions on Aave and Venus overnight, causing significant price volatility.”
Despite volatility, Aave is profitable
Chaos Labs analyzed the incident on Aave and pointed out that the price movement, which occurred over a two-hour period in late January, was caused by the liquidation of large BAL-backed positions, mainly from the portfolio known as humpy.eth, which represented the bulk of BAL’s exposure in the credit markets.
After these liquidations, the BAL market shrank by more than 95%, leaving residual debt exposure minimal.
According to Chaos laboratoriesAave emerged from this episode unscathed after recording a net positive position. The credit protocol processed $202.47 million in collateral seizures against $193.12 million in debt repayments over a seven-day period, during which a loss of 10 to 20% of key cryptocurrency assets occurred.
The protocol was able to raise $980,000 in liquidation fees and 804 ETH, worth approximately $1.85 million, through the Smart Vault Revenue recapture mechanism.
However, the credit protocol recorded a modest shortfall of $30,000 due to BAL-backed positions, which was the only material shortfall during the event.
On a net basis, liquidation activity proved economically beneficial for Aave, with SVR revenues alone exceeding realized deficits.
Chaos Labs has recommended further deprecation of BAL within Aave’s risk framework, and has proposed a reduction of the supply cap to one in an upcoming Risk Steward update.
Venuson the other hand, fell after an intraday sell-off that saw its mark, $XVSbriefly drops from $3.12 before stabilizing around $3.32. $XVS is trading at $3.60 at the time of writing.
What consequences does this liquidation have for Balancer?
BAL crashed from over $0.40 per token to its all-time low, trading around $0.18 on February 2. It is currently trading at over $0.22, down 2.4% in the last 24 hours.
BAL price chart. Source: CoinMarketCap
However, Balancer stated that “the protocol remains secure, fully operational and unaffected by these liquidations.”
It’s been about three months since Balancer suffered a $128 million exploit. That incident affected other platforms using the solution, and it’s safe to say that user trust may have been affected. So it is understandable that the platform will come out to clear the air before speculative forces take control.
BAL has been trading as high as $0.48 in recent sessions, which is a far cry from the all-time high of $74.45 reached in May 2021.
The crypto market saw some volatility around January 29, causing Bitcoin to fall below $80,000 for the first time in more than nine months. By February 2 Bitcoin fell below $75,000 and is currently trading around $78,000. Ethereum fell to the $2,100-$2,400 range during the period.