BAL Plunge Triggers Domino Effect: Balancer’s Token Collapse Sparks Mass Liquidations Across Aave and Venus

DeFi's interconnected risks snap into sharp focus as a single asset's downturn cascades through lending protocols.

The Liquidation Spiral

When Balancer's governance token, BAL, took a sudden nosedive, it didn't fall in isolation. The price crash acted like a detonator, setting off a chain reaction of forced sell-offs on major lending platforms Aave and Venus. Automated systems, designed to protect lenders, kicked in—liquidating positions that suddenly fell below their collateral thresholds. It's the classic DeFi domino effect: one wobble, and the whole stack teeters.

Protocols Under Pressure

The event puts the stress-testing mechanisms of these money markets under the microscope. How quickly do they react? How efficiently do they handle a surge in liquidation volume without clogging the network or creating worse slippage for everyone involved? These aren't academic questions—they're multi-million dollar ones for anyone with skin in the game. It's the financial equivalent of finding out your building's fire alarms also spray gasoline.

Smart Contracts, Dumb Panic

The code executed flawlessly. That's the problem. There's no circuit breaker, no human discretion to pause and assess—just cold, hard logic enforcing its terms. For believers in purely algorithmic finance, it's a feature. For everyone watching their position get automatically unwound into a falling market, it feels a lot like a bug. The system worked perfectly to make a bad situation worse, which in traditional finance is usually a job reserved for investment bankers.

This wasn't a market crash; it was a system crash. A stark reminder that in the race to disintermediate the old banks, we've built machines that can foreclose on you at light speed—no paperwork, no sympathy, just a transaction on the blockchain.

Aave comes out profitable despite volatility

Chaos Labs analyzed the incident that occurred on Aave, pointing out that the price movement, which occurred over a two-hour period in late January, was triggered by the liquidation of large BAL-collateralized positions, predominantly from the wallet known as humpy.eth, which represented the majority of BAL exposure across lending markets. 

Following these liquidations, the BAL market contracted by more than 95%, leaving minimal remaining debt exposure.

According to Chaos Labs, Aave came out of this episode unscathed after recording a net positive position. The lending protocol processed $202.47 million in collateral seizures against $193.12 million of repaid debt over a seven-day period that saw a 10 to 20% drawdown across major cryptocurrency assets.

The protocol was able to capture $980,000 in liquidation fees and 804 ETH, valued at around $1.85 million, through its Smart Vault Revenue recapture mechanism. 

However, the lending protocol recorded a modest $30,000 deficit stemming from BAL-collateralized positions, which was the only material shortfall during the event. 

On a net basis, the liquidation activity proved economically beneficial for Aave, with SVR revenue alone exceeding deficit realization.

Chaos Labs recommended further deprecation of BAL within Aave’s risk framework, proposing a reduction of the supply cap to one in an upcoming Risk Steward update.

Venus, on the other hand, fell after an intraday sell-off that saw its token, XVS, fall briefly from $3.12 before stabilizing around $3.32. XVS trades at $3.60 as of the time of writing.

How does this liquidation affect Balancer?

BAL crashed from over $0.40 per token to its all-time low, trading around $0.18 on February 2. Currently, it trades at over $0.22, a 2.4% drop in the past 24 hours.

However, Balancer stated that “the protocol remains secure, fully operational, and unaffected by these liquidations.”

It is roughly three months since Balancer suffered a $128 million exploit. That incident affected other platforms that utilized its solution, and it is SAFE to say that user confidence might have been affected. So, it is understandable that the platform will come out to clear the air before speculative forces take control.

BAL has been trading as low as $0.48 in recent sessions, which is a far cry from its all-time high of $74.45 reached in May 2021.

The crypto market experienced some volatility around January 29, which saw Bitcoin fall below $80,000, the first time in over nine months. By February 2, Bitcoin fell below $75,000 and currently trades around $78,000. Ethereum dropped to the $2,100-$2,400 range during the period.

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