In the past week, $1.7 billion worth of ETH flowed out of Aave, causing stETH to decouple and triggering fluctuations in the DeFi market.

In the past week, approximately $1.7 billion worth of ETH flowed out of Aave, and Aave community members believe that the founder of Tron withdrew at least $600 million, triggering a series of reactions in the market. This large-scale outflow of funds led to a sharp decline in ETH liquidity on Aave.

Ethereum whale fund flow causes stETH price decoupling

The continuous outflow of whales on Aave has led to a surge in ETH lending rates, while also boosting Aave's usage rate. This change has caused DeFi users who rely on leveraged staking strategies to begin liquidating their positions.

Among them, the strategy that was hit the hardest is the popular stETH/ETH leverage loop strategy. Data shows that the price gap between stETH and ETH widened sharply in the short term, before recovering somewhat.

Typically, users deposit ETH into Aave, borrow and purchase stETH, and repeat the process to earn staking rewards. However, due to rising borrowing rates and the weakening of the peg relationship with stETH, this strategy has become unprofitable.

As leveraged traders begin to exit the market, many users are flocking to exchange stETH for ETH. This move has led to congestion in the staking redemption queue, with the current redemption time taking about 18 days.

To avoid long waiting times, some users choose to sell stETH in the secondary market, resulting in a price difference of about 0.3% between stETH and ETH. This slight decoupling poses significant risks for leveraged traders. A 0.3% price difference could lead to a 3% loss with 10x leverage, forcing many users to either stop loss or continue holding illiquid positions.

If interest rates continue to rise, the situation may further deteriorate, leading to forced liquidation.

Market Reaction and Price Fluctuation

ETH has risen over 8% in the past week, briefly breaking above $3800, but then retreated from its peak. Meanwhile, the synthetic ETH (sETH) issued by Synthetix has increased by 30.5% in the past week, indicating a surge in demand for alternatives among investors amid market volatility.

This incident exposed the systemic vulnerabilities of the DeFi market. A single large withdrawal not only disrupted lending rates but also undermined popular trading strategies, revealing a reliance on oracle and delayed redemption mechanisms. Because many stETH oracles still use redemption rates instead of market rates, borrowers find themselves trapped in illiquid positions when the peg price drifts.

Conclusion:

The large-scale ETH outflow from Aave and the decoupling event of stETH prices reveal the vulnerability of the DeFi market in extreme conditions, especially during times of leveraged strategies and market liquidity tightness. Investors should be wary of market instability, particularly when liquidity tightness and delays in oracle updates may lead to significant losses.