Aave experiences oracle failure, $26 million worth of wstETH improperly liquidated

DeFi lending protocol Aave experienced a price oracle failure on March 10th on its Ethereum Core and Prime instances, resulting in approximately $26 million worth of wstETH positions being unfairly liquidated, affecting about 34 accounts. According to a report by Chaos Labs, Aave’s primary risk management provider, the issue stemmed from a configuration error in the relevant asset price oracle, not a fundamental design flaw.

Technical Root Cause of the Oracle Failure: Snapshot Rate and Timestamp Mismatch

(Source: Etherscan)

CAPO is a security mechanism designed by Aave to prevent sudden asset price surges. The core issue was a mismatch between the Snapshot Rate used by CAPO and the Snapshot Timestamp.

Chaos Labs’ report details the technical chain: the off-chain process determined that the wstETH snapshot rate should be updated to approximately 1.2282 (reflecting the market rate from 7 days prior). However, the snapshot rate parameter is limited on-chain, allowing only a 3% increase every 3 days, preventing an immediate update to the target value. This constraint caused the effective exchange rate used by the protocol to drop by about 2.85%, with the reported cap rate around 1.1939—significantly lower than the actual market rate of about 1.228—triggering erroneous liquidations of E-Mode positions.

Chaos Labs stated: “This incident does not reflect a flaw in the underlying CAPO or off-chain risk oracle design, but rather a misconfiguration caused by on-chain update constraints, leading to a mismatch between the snapshot rate and timestamp.”

Impact of the Event: Quantitative Data in Three Dimensions

The oracle failure can be quantified across the following dimensions:

• Unfair Liquidation Volume: Approximately 10,938 wstETH liquidated, totaling about $26 million.
• Affected Accounts: About 34 accounts suffered losses due to incorrect E-Mode position liquidations.
• Third-party Profits: External liquidators profited approximately 499 ETH from this incident.
• Protocol Bad Debt: None; Aave protocol did not incur any bad debt as a result of this event.

Compensation Plan: 141.5 ETH + DAO Treasury Funds

Following the incident, Chaos Labs quickly intervened, temporarily lowering the lending cap for wstETH and manually adjusting the snapshot parameters to restore the oracle value to the correct level.

For compensation, two sources of funds will be used: 141.5 ETH recovered from the incident and up to 345 ETH from the Aave DAO treasury. Chaos Labs stated that the compensation efforts are underway and will be directly paid to the approximately 34 affected accounts.

Frequently Asked Questions

What is Aave’s CAPO oracle, and why did it fail this time?

CAPO (Correlated Asset Price Oracle) is a security mechanism designed by Aave to prevent sudden asset price surges. The failure was caused by the off-chain process not fully accounting for the on-chain update limit of a 3% increase every 3 days, leading to a mismatch between the snapshot rate and timestamp, which caused the oracle to report a cap rate far below the actual market rate, triggering erroneous liquidations.

Did the Aave protocol incur bad debt due to this failure?

According to Chaos Labs’ post-incident analysis, the Aave protocol itself did not incur any bad debt. The losses were concentrated in the 34 user accounts that were improperly liquidated and the third-party liquidators who gained approximately 499 ETH in profit. The overall financial health of the protocol remains unaffected.

How will affected Aave users receive compensation?

A compensation plan has been initiated, which will use the recovered 141.5 ETH and up to 345 ETH from the Aave DAO treasury to directly pay affected accounts. Chaos Labs stated that the compensation process is ongoing.