Layer by Layer Issue 41: Avalanche, Algorand, and Polkadot

Lending activity in crypto has taken center stage in 2022 as a series of high-profile insolvencies across the industry has revealed the web of underlying risks in centralized lenders and investment firms, as well as the DeFi protocols they often utilize to generate returns. In the aftermath of the collapse of Terra’s UST and LUNA in May, we began to see numerous instances of lending protocol failure in the face of market volatility. Namely, sharp drops in the value of collateral assets gave rise to various oracle malfunctions across L1 ecosystems, leaving some protocols undercollateralized and some nearly drained of all deposits. 

In the recent Harmony bridge exploit, about $100 million worth of assets were stolen,  effectively erasing the value of their corresponding wrapped assets on the Harmony chain. This made lending protocols such as Aave and Tranquil immediately vulnerable to exploitation, especially since their oracles did not respond to the event quickly enough to prevent the rapid accumulation of bad debt. Latest estimates by the Harmony team put the total losses between the two protocols at about 86 million ONE tokens or about $1.72 million that depositors were unable to withdraw.