Aave Incident Highlights Risks of Liquidity Depth Failures in DeFi

A recent incident has brought attention to the risks associated with decentralized finance (DeFi) and the importance of liquidity depth in automated market makers (AMMs). On a specific date, Aave's CoW Swap integration on SushiSwap experienced a significant slippage event. The incident occurred when users exchanged $50.43 million of AethUSDT for approximately $36,000 of AAVE.

The trade executed via Aave.com's integration with CoW Protocol's solver network and touched a shallow SushiSwap pool, exacerbating the price impact. This incident has led to a discussion about the responsibility of various parties involved, including Aave Labs, CoW Protocol, traders, and MEV bots and block builders.

Industry experts have highlighted the need for hard slippage caps, liquidity checks, and solver constraints to prevent such incidents. Protocols can enforce hard slippage ceilings that override user settings at extreme sizes. Pre-trade liquidity checks across all candidate pools should block routes below minimum depth thresholds for the requested notional.