TL;DR

Following Bybit’s $1.4 billion hack, the cryptocurrency market faced severe turmoil. How DeFi (Decentralized Finance) platforms responded to the largest hack in history, along with the potential contagion risks and USDe price fluctuations, became the focal point of the crypto space.

After the attack, the Chaos Labs team, in collaboration with bgdlabs, AaveChan, and LlamaRisk, formed an emergency task force to assess the risks Aave might face and the potential systemic risks.

The task force focused on several core issues: Bybit’s solvency, the possibility of a larger-scale attack, and the potential impact of bankruptcy or debt restructuring on Aave, especially considering the exposure of sUSDe.

Ethena Labs confirmed that their funds were held in custody by Copper.co, but the market remained concerned about the potential chain reaction from Bybit’s inability to settle profits and losses, and whether USDe would face further decoupling risks.

An analysis of Bybit’s bankruptcy risk highlighted three main concerns: the exposure risk from the failure of USDe’s hedge, the chain liquidation risk triggered by falling ETH prices, and the potential for contagion in DeFi. This prompted stakeholders to accurately quantify losses to determine whether measures such as freezing the sUSDe market were necessary. Transparency dashboards revealed Ethena’s ETH configuration with Bybit, while Ethena Labs’ collateral was safely stored off-chain at Copper.co. This custodial solution and off-chain settlement mechanism allowed Ethena and USDe to effectively avoid the bankruptcy risks seen with exchanges like FTX.

In the scenario where the $400 million nominal ETH position could not be liquidated, and assuming ETH prices fell by 25% before Copper.co released funds, Ethena could face an unhedged loss of $100 million. However, considering a $60 million insurance fund, the total loss support for USDe was estimated at just 0.5%.

Based on the relatively controlled risk assessment, Aave prepared risk response plans and continuously monitored developments.

Regarding pricing, USDe showed significant price discrepancies across different exchanges. On the Bybit platform, due to panic selling and the lack of immediate arbitrage opportunities, USDe/USDT briefly fell to $0.96.

In contrast, on-chain pricing was more stable, with only a brief decoupling to $0.994, which was quickly restored through arbitrage. This discrepancy was primarily due to the redemption mechanism and the role of oracles.

Unlike CeFi, USDe’s redemption could occur continuously and atomically on-chain through the Mint and Redeem contract. The on-chain redemption mechanism operated smoothly, completing $117 million in redemptions within hours. Ethena Labs also raised the redemption buffer to $250 million and maintained price stability by continuously replenishing it until USDe regained its peg. Due to the atomic nature of USDe redemptions, whitelisted redeemers quickly bridged the price gap on Curve.

However, oracle anomalies exacerbated market risks. Chainlink’s USDe/USD price oracle diverged from on-chain prices, falling to $0.977, even though the redemption mechanism was still functioning normally.

This discrepancy led to a $22 million liquidation on Aave, as traders were liquidated due to secondary market price fluctuations, despite the collateralization of their USDe assets being in good standing.

This highlighted the room for improvement in the oracle mechanism. A smart data source integrated with Proof of Reserves could potentially offer a more accurate USDe valuation, preventing unnecessary liquidations. This would take into account real-time redemptions rather than relying solely on the weighted average trading price. Such smart oracles could: Prevent unnecessary liquidations;Maintain capital efficiency;Reduce market pressure.

Areas for Improvement

Risk, price, and reserve data must work in coordination rather than in isolation to ensure value and maintain the resilience of DeFi systems under pressure. Price oracles should reflect the real collateral support, rather than just secondary market prices.

Overall, the DeFi ecosystem withstood this stress test. The Bybit team stabilized the market by maintaining transparent communication, the Ethena Labs team quickly eliminated risk exposure to ensure smooth redemptions, and Aave effectively managed risk without generating bad debt.

This event highlights the need for smarter oracles and risk-sensing infrastructure to build more resilient systems. While ensuring security, capital efficiency should also be enhanced. A major stress test is just a matter of time, and the industry needs to prepare in advance.

Disclaimer:

1. This article is reprinted from [Yuliya, PANews], and the copyright belongs to the original author [Omer Goldberg]. If you have any objections regarding the reprint, please contact the Gate Learn team, and they will address it according to the relevant procedures.
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