AMPL depositors complained of funds tied up in Aave.
Depositors of Ampleforth's AMPL stablecoin, the popular decentralized finance (DeFi) borrowing and lending protocol Aave, are complaining of funds tied up due to a lack of lending pool. The issue which prevented AMPL depositors from withdrawing their assets from Aave continued from December 2023. Other DeFi pools on Ave are not affected by the issue.
AMPL is a stable coin designed to track the 2019 US dollar value adjusted for inflation. The protocol increases or decreases the number of tokens available depending on whether the price matches the dollar target.
In the year In November 2022, Awe was the victim of a market manipulation attack on its Curve (CRV) pool. The attack failed to make any profit for the attacker, but resulted in $1.6 million in bad debt for the protocol. In response, AaveDAO voted on November 2, 2022 to offer deposits and loans to 17 different tokens, including AMPL.
The freeze didn't keep old depositors out at that time, except it prevented new deposits and loans. However, in a December 2023 post on the AaveDAO forums, Bored Ghost Developing Labs (BGD Labs), a development team contributing to the Aave protocol, claimed to have discovered an additional problem preventing withdrawal. According to him, an error in the pool's contract allowed him to withdraw, meaning there was insufficient liquidity to process the withdrawal.
In response to the case, Ampleforth's representative proposed that AaveDAO buy AMPL tokens and distribute them to users as compensation, but Aave developers opposed their own proposal to pay in stablecoins instead of AMPL. Aave developers have asked the Ampleforth team to provide 40% of the compensation package from its own funds. At the time of publication, the Ampforth team has not confirmed that it has provided these funds, but has announced that it will continue to provide support to help resolve the issue.
On March 31, BGD Labs proposed to pay a deposit of $300,000 USD. He said that this is only the initial distribution and the rest of the money can be paid after further discussion. Although it did not completely resolve the debate, the proposal was approved on April 5 with over 99.9% of the vote.
Related: Aave buys 2.7M CRV to clear bad debt following failed Eisenberg raid
Aave developers found a liquidity problem for AMPL
According to Aave's GitHub documentation, when tokens deposit funds into a lending pool, they should receive an equivalent amount of “aTokens” in return. These aTokens basically act as depository receipts. Since the pool receives interest payments, depositors must receive an additional aToken representing their share of these interest payments.
But BGD Labs says the AMPL pool contract is not working as intended: it has a flaw that causes it to pay more AMPL aTokens (aAMPL) than the underlying AMPL amount. As a result, there is not enough AMPL in the pool to allow depositors to withdraw. BGD Labs says:
“The aToken supply of the asset appears to be greater than it should be, greater than the sum of the variable debt and the available liquidity. […] AMPL's provision does not represent claims currently under AMPL. […] Usage is 100% so no withdrawals, only charges and fees.
BGD Labs says Ampforth developers designed and wrote the contract, not AaveDAO contractors. He reached out to the Ampforth team and asked to know how much AMPL owed each depositor. BGD Labs is asking depositors to be patient while the Ampleforth team tries to come up with a solution to the problem.
Ampforth offers token buyback with Aave collector
On January 31, Ampforth developer Ahmed Naguib Ali, known simply as “Naguib” on the Ave management forum, said the team was aware of the problem and working to resolve it. “We have been coordinating [AaveDAO risk managers] Chaos labs and Gauntlet for an effective solution,” he wrote. On March 8, Naguib gave a detailed assessment of the problem and proposed a solution. According to him, some depositors withdrew before the exorbitant interest charges appeared, so the pool was running short. As a result, these early funds exhausted the funding:
“More interest is given to depositors than what is paid to lenders. This difference resulted in situations where some depositors were able to withdraw more than they would have otherwise. As a result, we are now experiencing a liquidity crunch preventing depositors from withdrawing their funds.
According to Naguib, Ampforth was unable to determine the exact amount of AMPL due for each deposit at the time. However, the group expected to determine these values by March 22.
Naguib said that the Aave protocol has some tokens in the “Aave collector” contract. He pointed out that once the exact amount of AMPL is known for each deposit, these tokens can be used to refund users. An “upper limit” of 715,335 AMPL (about $1.3 million at March 8 prices) is needed to fully compensate users. Naguib proposed using these reserves to buy AaveDAO AMPL on the open market, which should be distributed to depositors in future contracts.
On March 17, Naguib withdrew the proposal, saying that BGD Labs did not agree with it. “BGD Labs has come to the conclusion that they have not found the proposal to change the AMPLs and release them to the owners to be an effective way to resolve the situation and would like to come up with a different solution,” he said.
Aave developers have proposed a stablecoin compensation
On March 21, BGD Labs and Aave risk management consultancy Chaos Labs introduced a joint proposal to compensate depositors. The two groups estimated the shortfall at 533,973 AMPL (about $1 million at March 21 prices).
According to them, this amount of AMPL represents more than 30% of the circulating supply. Buying so much AMPL would be ineffective given its “relatively illegal nature and would alter the fundamental economics of the asset for good”. Instead, they proposed that depositors be compensated based on the average value of the US dollar during the four months from November 22, 2010. This equates to $1.198 per AMPL or a total of $639,700, which can be paid in statscoins such as USDC.
Chaos Labs and BGD Labs also suggested that Ampleforth should provide 40% of the funds to compensate depositors, with AaveDAO footing the bill for the other 60%:
“Considering that the problem is with the Aave contract, the implementation is done by the Ampforth team, we have proposed that a total of 60% (Aave) and 40% (Ampforth) split be placed on the smart contract for distribution,” he said.
This new idea was criticized by many forum participants. Some critics said it was unfair for depositors to receive stablecoins as compensation. “Features of the proposed proposal include paying AMPL holders a lower market value of USDC than actual AMPL,” user Fiddlekins said in a post. This is not logical, because it is “paying them.” [depositors] If they want to repurchase AMPL in USDC, the price pressure will shift the burden to them and prevent them from selling the assets they should have at the current higher prices.
Fiddlekins noted that AaveDAO sold 283,500 aAMPL of its reserves on January 23, receiving $363,000. “Let's be clear: The DAO seems happy to sell low but not to buy high, and they argue that lenders should bear the burden of that,” he said.
Other critics raised the idea of a 60%/40% funding split between AaveDAO and Ampleforth. “Why should Forth DAO pay for AAVE smart contract if there are problems?” Roman Pop asked. In response, QuantumEvolver argued that both parties were responsible. “The developers of AMPL made a mistake in the smart contract from the beginning, and they still can't figure out exactly what the mistake was. And AAVE is also to blame for having to audit the smart contract to make sure it works well before integrating it into the AAVE platform.”
Related: Aave Deploys DeFi Protocol on BNB Chain
BGD Labs offered a $300,000 compensation plan
On March 31, BGD Labs presented a new proposal: AaveDAO would pay depositors $300,000 in stablecoins from the reserves in the Aave aggregator contract. The idea was important because “We have no news from the Ampforth team. If Ampforth wants to contribute to the compensation plan at a later date, “we expect to reach consensus in this forum,” BGD Labs said, adding that such a contribution is “technically feasible.”
The proposal was approved on April 5 with more than 99% of the vote.
In a post outlining the proposal, BGD Labs said the amount owed to depositors would be “more than $300,000”, adding that even after that, at least one more distribution would be needed to make up the depositors.
Amplified reaction
On April 7, Naguib released a statement attempting to clarify Ampforth's position on the matter. In May 2022, the group said it had discovered incorrect interest payments. However, at that time, “the difference was small, much less than AMPL's reserve balance. Aave also planned to transition to Aave version 3 at the time, and the two teams agreed to freeze the pool until that transition was complete.
According to Naguib, all depositors agreed to AaveDAO using AMPL reserves to cover any shortfall before withdrawal.
After this discussion, deposits and loans to the AMPL pool were suspended on November 22, 2022. But on November 25, the deposit was reactivated, leading to a large deficit for the pool over time. AaveDAO then sold its AMPL store on January 23, 2023, making it very difficult for AaveDAO to cover the shortfall. According to Naguib, Ampforth was initially unaware of both of these incidents.
When the Ampforth team realized that the shortfall had grown too high, it proposed what it saw as a “simple and non-controversial solution” which was to “pick a day before the gap starts to grow significantly and assume that the lenders hold AMPL.” Since then. This calculation allows a compensation package to be prepared quickly, and could have been covered by some of AaveDAO's reserves and Ampforth's funds. Naguib said the idea was presented to the BGD Labs team privately.
BGD Labs rejected Ampforth's suggestion and instead asked it to calculate the amount owed based on off-chain AAVE platform behavior tokens. This simulation process took longer but finally the Ampleforth team scored on March 8th for AaveDAO to buy AMPL to pay back the depositors.
Naguib argued that Ampleforth's team “will continue to provide the necessary support for investigation and for BGD Labs to reach a proposal that satisfies the community,” but that the team believes BGD Labs “must lead to a solution.” they [BGD Labs] They are the best at doing this job.
