DeFi | AAVE Implements AAVE Shield to Automatically Block Swaps with Over 25% Price Impact

AAVE, the leading, decentralized non-custodial liquidity protocol that allows users to lend and borrow cryptocurrencies without intermediaries, has introduced a safeguard for platform users that blocks any swap with a price impact greater than 25%.

In a post-morten report on a swap incident which saw one user loose over $50 million in a swap attempt, AAVE said:

“AAVE Shield creates a high friction guardrail for users, requiring them to have to manually visit the Settings menu and intentionally disable the AAVE Shield protection in order to proceed with a high-risk trade.”

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AAVE said the new protection feature however does not compromise on permissionless operations for advanced users and it is ‘yet another layer of protection to prevent accidental confirmations.’

Emphasizing on the need for balance between permissionless finance and protection, AAVE said:

“Our core building philosophy is based around the principles of permissionless finance. At our core, Aave Labs builds products that balance the tradeoff between permissionless operations and protecting users from mistakes.

Permissionless operations can be critically important in times of market stress. For example, sometimes it’s very important for users to execute swap at any slippage or price impact and when user discretion is critical.”

AAVE also took the opportunity to highlight a misconception regarding the incident saying that it occured as a result of an illiquid market and not due to slippage.

“It is critical to distinguish between price impact due to an illiquid market and price impact due to slippage. An illiquid market is one where there is not enough available supply of an asset at a given price to fill a large order without significantly worsening the price.

A large order in an illiquid market will have a high price impact. Slippage is the margin the user accepts for a given market price to allow the platform to fill the order as fast as possible, which will usually involve a “surplus” (as defined by CoW Swap) for the value not needed.

In this incident, the issue was an illiquid market rather than slippage. The user was quoted a price that was already 99.9% below expected market clearing value for the underlying assets of aEthUSDT and aEthAAVE due to the trade’s disproportionately large size relative to available liquidity. The unfavorable outcome was a result of the confirmed quote, not a change in price during execution.”

The $50 million swap loss has caused industry backlash with some saying the recent AAVE safeguards are still not enough.

Here is some feedback from users:

“This solution is still not perfect. In extreme cases, users should be required to manually enter a piece of text instead of simply clicking a checkbox. This is a very common practice, and I hope it can be added.”

“Why not fill the swap through DEX once the LP can’t fulfill the entire request? It’s like the user wants to buy $100 worth of AAVE and the LP only have 1 token left, so they priced it at $100 each just to fulfill the request… that is kinda lazy and unfair solution to make sure that all transactions will push through.”

“The most impressive part of this post-mortem is your incredible generosity! You’re really refunding the $110k interface fee out of the $50M the guy lost? Wow. That’s like totaling someone’s car and handing them a pine air freshener as compensation.”

“This is the real lesson: size without liquidity depth is not conviction, it’s exposure. The protocol wasn’t hacked. The market just showed what happens when order size overwhelms available exit liquidity.”

“This is pure extraction. This is what makes DeFi look bad.”

“This is exactly what I warned about in the recent Aave Labs proposal. The protocol wasn’t the issue. The product built on top was. Once you vertically integrate products under the same brand, failures in those layers inevitably bleed into the protocol’s reputation. The more centralized products launched under the Aave brand, the more reputational damage from outside the protocol will accumulate.”

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