Crypto Trader Loses $500,000 Due to deUSD Price Spike and Market Volatility on the Decentralized Lending Platform Euler on Avalanche

A Forex Trader Incurs Huge Losses Due to Crypto Market Fluctuations

On an unfortunate Thursday, a trader operating in the crypto realm reportedly lost over half a million dollars. The catastrophic loss resulted from a liquidation incident, prompted by a chain of events out of the trader’s control, as per information obtained from blockchain data.

The Incident and Responding Factors

A series of substantial trade transactions on the deUSD/USDT Curve pool preceded the regrettable episode. These transactions caused a temporary inflation in the price of deUSD, a synthetic dollar issued by the renowned Elixir Network. Typically, deUSD is pegged to the US Dollar. However, the price hike led to inevitable liquidation on Euler, the decentralized lending platform running on Avalanche. One of the leading Chainlink advocates, Zach Rynes, better known in the community as ChainLink God, stated that trading volume in the less liquid Curve pool on Ethereum experienced a sudden surge. Consequently, deUSD value momentarily climbed to almost $1.03. He referred to a significant deal executed by MEV bot JaredFromSubway that involved swapping $210,000 USDT for $202,000 deUSD. These trades on the deUSD/USD Curve liquidity pool, accounting for approximately half of the day’s trading volume, prompted the short-term rise in deUSD’s price above $1. As Rynes mentioned, Chainlink feeds for deUSD provide the market-wide volume weighted average price (VWAP). Therefore, the given feeds mirrored these trades in their pricing reports.

Criticism of Onchain Oracles

The incident rekindled doubts about the reliability of onchain oracles, which are third-party services that offer price information to blockchain applications. A group of developers raised the suspicion that oracles, including Chainlink, might be susceptible to manipulation, particularly in markets lacking adequate trading volumes. Chaos Labs founder Omer Goldberg openly commented that Chainlink had only proved that oracles are amongst the weaker links in DeFi operations. Similarly, Pepito, a representative from Pyth, suggested the possibility of Chainlink being manipulated.

Defending Chainlink’s Pricing System

Rynes, in response, defended Chainlink’s pricing mechanism, which employs a volume-weighted average pricing (VWAP) system. This system takes into account all available trading statistics and broadcasts that information to connected applications. He proceeded to justify that the oracle functioned correctly in this instance but did so in a volatile and illiquid market. He pointed out that deUSD has a total supply close to $185 million, out of which $42.7 million is active on Avalanche. Given the asset’s low liquidity and trading volume, it was assigned to the ‘High Market Risk’ category, making the market price susceptible to abrupt changes or instability. He emphasized that precautions are necessary while creating markets involving such assets. However, Goldberg later insisted that Chainlink could adopt a more predictable method for pricing stablecoins, which could include theoretically capping the price or utilizing a robust algorithm less vulnerable to anomalies.

Chainlink: A Major Player in the Oracle Space

Chainlink currently oversees nearly $45 billion worth of assets across approximately 20 chains, establishing it as the most extensive oracle in operation. Despite the widespread criticism, the platform continues to secure a significant position in the market, underscoring the critical role oracles play in shaping the crypto market.

Conclusion

This incident serves as a stark reminder to crypto traders about the volatility and unpredictability of the market. It emphasizes that even with advanced technology like blockchain and platforms like Chainlink, the potential for massive losses looms. Participants in this fast-paced financial realm must navigate these waters understanding the high level of risk involved.