ZRX could drop sharply, and if that happens, then the governance token of the protocol is likely to result in bad debt. This comes to light as the lending market has been frozen since November 2022. Aave v2 reportedly hosts a wallet with $2.5 million in outstanding debt. This is against $8 million worth of the token, which is in consideration for liquidation. The condition is that ZRX should drop by 22%.
There is a slight chance of this incident happening because the borrower has been actively repaying their debt, with approximately $470,000 repaid in the previous month. This is crucial because the liquidity on-chain is limited, and a sale would lead to a 60% drop, according to an estimate made public by Matcha, a DEX aggregator. This would happen under the sale of 1 million ZRX.
The borrower holds 47 million in tokens. Hence, a partial liquidation would require something bigger than the previously said limit.
Generally, liquidators sell the collateral instantly to earn massive profits. They return 7.5% in bonus after liquidating a ZRX market. So, assuming liquidity happens for a small quantity, it would not yield any profit to the liquidators. On the other hand, if the trading price of ZRX drops sharply and the borrower takes no action, Aave would take the ultimate hit in the form of bad debt.
Aave will then be required to sell its AAVE tokens from the Safety Module. This will help Aave cover the deficit. It holds up to $235 million of Aave that has been staked. Technically, the hit will not be a major concern, but it will be enough to put a dent in the ecosystem. The annual revenue comes to around $17.2 million, as per data made available by Token Terminal.
When a lending market freezes, users lose access to borrow and deposit their funds. The phase only keeps the doors open for the repayment of loans. The position will be eligible for liquidation if the token drops to $0.137.
The borrower made two recent payments to Aave: $110,000 two days ago and $360,000 in the last month. There is barely anything to worry about except if the situation worsens. There are now questions in the air about representatives of the project; however, Aave and 0x have declined to comment on the matter.
Meanwhile, 0x is facing tough times against the CFTC (Commodities Futures and Trading Commission). It has been asked to cease operations that violate the Commodity Exchange Act, along with Deridex and Opyn. They have also been ordered to cease operations that violate CFTC regulations. Advocates for the industry have, in return, sought answers to questions about whether the landscape is feasible for entrepreneurs to work in. The DeFi sphere continues to come out safely from its current troubles.