Tron founder and CEO, Justin Sun, withdrew $4.2 billion from the Aave protocol project pool recently. Sun’s withdrawal of that amount from the liquidity pool resulted in massive spikes in the interest rate of the DeFi platform, caused by a reduction in the liquidity pool. Aave is a DeFi network that provides a variety of lending services with interest rates set for different packages. Sun’s removal of such a huge amount from the liquidity pool has now sparked debates and worries in the Aave community who are naturally wary of another exploitative situation like that of another DeFi platform, CREAM finance.
What Happened?
In a tweet on Friday, Andre Cronje said that Aave was vulnerable to the same exploitation that CREAM suffered but has sustained a 24-hour defamation on Yearn over the issue. CREAM finance had experienced a flash loan attack that removed $130 million from its pool and sent community members into a panic. The CREAM community is now at loggerheads with Aave for what it perceives as promoting speculations relating to potential exploitation. He further questioned Aave’s security protocol by challenging them to explain if their security is any better than Yearn’s. Andre Cronje is a popular cryptocurrency commentator who has a large following on Twitter.
Aave is now set to stem the negative effects by carrying out some actions including the suspension of lending and borrowing, deposit freezing, and rate swaps. The measures were proposed by the Aave community members who called on the project executives to take quick steps in saving the network. Nearly 600,000 people have signed the proposal with only a few hours left for voting to close.
Rising Concerns Over Flash Loan Attacks
There are rising concerns from the crypto community and government regulators over the growing number of flash loan attacks that the DeFi community is seeing in recent days. Flash loan attacks are now being used in a similar way to what is called wash trading in traditional financial systems. Recently, a flash loan attacker bought a CryptoPunk NFT using borrowed funds to the tune of $532 million. Since the attacker now retains ownership of the NFT, he or she can make profits from selling it. This has exposed an overlooked window of opportunity for money laundering that investigators and regulators find worrisome.
Cryptocurrency regulation is an increasing problem for governments and crypto communities. The industry is largely decentralized and that makes it difficult for proper regulation to be enforced. DeFi has also been under much scrutiny in recent months as the government races to have some kind of control that can prevent the loss of funds due to hackers and fraudulent projects being launched on networks.
While DeFi has brought modern digital financial solutions that are rivaling and even outperforming the traditional financial institutions in some areas, the technology is largely unstudied. Working with government regulators, project creators will hopefully find a balance between innovation and safety to build a system that everyone is comfortable with.
