The Balancer protocol has attributed the decline in its native BAL token to an external market event involving mass liquidations on DeFi lending platforms Aave and Venus.
Balancer announced on X, “We observed significant liquidations of large BAL positions on Aave and Venus overnight, which led to significant price volatility.”
Aave comes out profitable despite volatility
Chaos Labs analyzed the incident that occurred on Aave, pointing out that the price movement, which occurred over a two-hour period in late January, was triggered by the liquidation of large BAL-collateralized positions, predominantly from the wallet known as humpy.eth, which represented the majority of BAL exposure across lending markets.
Following these liquidations, the BAL market contracted by more than 95%, leaving minimal remaining debt exposure.
According to Chaos Labs, Aave came out of this episode unscathed after recording a net positive position. The lending protocol processed $202.47 million in collateral seizures against $193.12 million of repaid debt over a seven-day period that saw a 10 to 20% drawdown across major cryptocurrency assets.
The protocol was able to capture $980,000 in liquidation fees and 804 ETH, valued at around $1.85 million, through its Smart Vault Revenue recapture mechanism.
However, the lending protocol recorded a modest $30,000 deficit stemming from BAL-collateralized positions, which was the only material shortfall during the event.
On a net basis, the liquidation activity proved economically beneficial for Aave, with SVR revenue alone exceeding deficit realization.
Chaos Labs recommended further deprecation of BAL within Aave’s risk framework, proposing a reduction of the supply cap to one in an upcoming Risk Steward update.
Venus, on the other hand, fell after an intraday sell-off that saw its token, $XVS, fall briefly from $3.12 before stabilizing around $3.32. $XVS trades at $3.60 as of the time of writing.
How does this liquidation affect Balancer?
BAL crashed from over $0.40 per token to its all-time low, trading around $0.18 on February 2. Currently, it trades at over $0.22, a 2.4% drop in the past 24 hours.
BAL price chart. Source: CoinMarketCap
However, Balancer stated that “the protocol remains secure, fully operational, and unaffected by these liquidations.”
It is roughly three months since Balancer suffered a $128 million exploit. That incident affected other platforms that utilized its solution, and it is safe to say that user confidence might have been affected. So, it is understandable that the platform will come out to clear the air before speculative forces take control.
BAL has been trading as low as $0.48 in recent sessions, which is a far cry from its all-time high of $74.45 reached in May 2021.
The crypto market experienced some volatility around January 29, which saw Bitcoin fall below $80,000, the first time in over nine months. By February 2, Bitcoin fell below $75,000 and currently trades around $78,000. Ethereum dropped to the $2,100-$2,400 range during the period.
