Over the past week, more than $1.7 billion worth of ETH has been withdrawn from the Aave lending protocol. According to community speculation, at least $600 million of that sum belongs to Justin Sun, the founder of Tron. This major exit has significantly reduced ETH liquidity on Aave.
Rising Borrowing Costs and the stETH Depeg
As utilization rates surged on Aave, ETH borrowing costs spiked sharply. DeFi users relying on leveraged staking strategies—especially the popular stETH/ETH looping method—were forced to unwind their positions.
In this strategy, users deposit ETH, borrow against it, purchase stETH, and repeat the cycle to earn staking yields. However, as borrowing rates climbed and the stETH/ETH peg weakened, the strategy became unprofitable.
Withdrawal Queues and Secondary Market Selloffs
As users rushed to exit, many sought to redeem stETH for ETH, leading to congestion in the withdrawal queue, which now takes around 18 days to process. To avoid the wait, some began selling stETH at a discount on secondary markets, triggering a depeg of approximately 0.3%.
Although seemingly minor, such a price gap poses serious risks for leveraged traders. On 10x leverage, a 0.3% depeg can translate into a 3% loss, forcing many into liquidations or illiquid positions.
Market Reactions and DeFi Fragility
While ETH rallied by up to 8% last week, hitting $3,593, stETH lagged behind. Meanwhile, sETH, the synthetic ETH token issued by Synthetix, surged 30.5%, reflecting a growing demand for alternatives amid market stress.
This event once again highlights the fragility of DeFi protocols, where a single large withdrawal can disrupt lending markets, break popular strategies, and expose users to oracle delays and redemption inefficiencies.
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