Aave v2, a decentralized finance (DeFi) protocol for lending and borrowing tokens, has recently undergone an update of over 120 million US dollars. However, the update has caused user assets to be “stuck” on Polygon, an Ethereum side-chain. The problem has been linked to Proposal 224, which attempted to make changes in the protocol for the benefit of the platform due to the changes in the cryptocurrency market. Despite receiving majority approval and being implemented, the DeFi protocol was deactivated due to several issues affecting the interest rate strategy contracts applied to Bitcoin, EthereumMATIC, and USDT stablecoin.
The development team attributed the main cause of the problem to the updated version, which differed slightly from the integrated version of Ethereum with regard to the LendingPool rate strategy of an asset applied on Polygon. While users cannot withdraw their assets, the DeFi protocol assures that all funds are safe. Analysts believe that the specific problem is incompatibility between the ReserveInterestRateStrategy contract and the underlying Polygon network. Since the contract was designed specifically to work on Ethereum, it could not function on Polygon, resulting in users being unable to withdraw their tokens.
The ReserveInterestRateStrategy contract is a core contract in Aave that helps calculate and apply interest rates for loans based on various factors, including prevailing market forces, the risk of user defaults, and collateral ratio. All loans in Aave are overcollateralized, which means that a borrower must deposit more collateral than the value of the loan requested.
The Aave team plans to fix the issue, depending on the outcome of ongoing investigations and voting within the community. Although affected users will start withdrawing assets from Aave v2 later this week, depending on governance times, the fix may take around seven days to be implemented.
Despite the error, AAVE prices remain stable and have been within the bullish range since May 17th; however, since the problem came to light on May 19th, the token has dropped 25% and is currently in a bearish formation. The situation remains fluid, and it remains to be seen how prices will react over the week. Nevertheless, the Aave team's commitment to fixing the problem inspires confidence in the platform's integrity and commitment to user safety.
