Whale withdraws 600 million USD ETH: The hidden vulnerabilities of the DeFi ecosystem exposed

After an impressive breakout with a 50% increase following a parabolic model in just one month, Ethereum (ETH) has witnessed a 6.5% adjustment – a development that clearly reflects the classic rules of the crypto market. This is the time when the RSI indicator cools down, the market begins to hunt for liquidity from long positions, and investor sentiment quickly reverses.

Typically, such corrections are seen as a necessary "reset" step – helping to cleanse excessive leverage and bring the funding rate back to a balanced state. Theoretically, that is when smart money begins to quietly accumulate.

However, with Ethereum, a surprising factor has completely changed the scenario: the withdrawal of 600 million USD ETH from the ecosystem. Instead of a healthy correction, the market now faces a structural risk in the DeFi sector of Ethereum – a warning sign that cannot be overlooked.

The yield engine of Ethereum slows down as Aave is drained

Aave (AAVE) has long played a key role as a liquidity hub in the DeFi ecosystem of Ethereum. The entire system operates based on a solid liquidity buffer to maintain the delicate balance between borrowing and lending interest rates. However, this balance has just undergone a severe shock.

Everything started when Justin Sun unexpectedly withdrew 600 million USD worth of ETH from the system, creating a huge liquidity hole. As a result, the reserves of ETH on Aave were nearly depleted.

Source: XWhat are the consequences? The interest rate for borrowing ETH has skyrocketed, surpassing 10.06%, making the cost of using financial leverage extremely expensive. And those who are most heavily affected are the "loopers" – traders who follow the strategy of rotating between stETH and ETH to optimize staking yield.

This strategy works as follows: users stake ETH through Lido to receive stETH, then use stETH as collateral on Aave to borrow ETH. The borrowed ETH is then staked again, creating a leverage loop to maximize profits.

For example: a person staking 100 ETH will receive 100 stETH, deposit it into Aave, borrow 80 ETH, and then continue to stake and repeat the cycle. When the borrowing interest rate is low, this is an attractive profit-generating tool, and it can even double the staking yield.

But when borrowing costs soared above 10%, this loop collapsed. The loopers were forced to unwind their long positions, leading to a wave of selling of stETH in the crypto market, resulting in a slight decline of stETH compared to ETH.

A capital pullback slows down the rise of ETH

The domino effect quickly spreads throughout the Ethereum market. As loopers start to dump stETH en masse, selling pressure spreads to ETH, causing the market to shake. Liquidity gradually dries up, slippage begins to occur, and volatility spikes.

At the same time, the open interest plummeted sharply. In a short period, around 150 million USD in long positions were liquidated - coinciding with the moment ETH reached a short-term peak around the $2,860 range. This is a typical "local peak": the market is too hot, leverage is abused, and the liquidation event is just a matter of time.

ETH/USDT daily chart | Source: TradingViewAlthough it did not occur as a large-scale sell-off, this correction has created significant resistance for the upward trend, causing Ethereum's recovery momentum to temporarily stall.

What is the most noteworthy thing? It turns out that Ethereum's DeFi platform is not as decentralized as many people think. Just one rotation of the whales is enough to trigger a liquidity crisis, sweeping away leverage and exposing the fragility of the entire system. Nevertheless, ETH still resiliently overcomes this downturn.

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