AMPL depositors complain of frozen funds on Aave

Some users of Ampleforth’s AMPL stablecoin have expressed concern over being unable to access their funds in the lending pool on Aave, a widely-used decentralized finance (DeFi) platform. This issue, which has prevented AMPL depositors from withdrawing their assets since late 2023, is specific to this particular pool. The other pools on Aave continue to function normally.

AMPL is a digital currency that aims to maintain an equal value with the US dollar, factoring in inflation. The system automatically issues or redeems tokens depending on whether their price deviates from the set dollar price.

In November 2022, it was claimed that Aave suffered an attempted market manipulation on its Curve (CRV) pool. This attack did not yield any profit for the perpetrator, but resulted in a loss of $1.6 million for the protocol. As a reaction, on November 2nd, 2022, AaveDAO made the decision to halt deposits and borrowing for 17 different tokens, among them AMPL.

At that point in time, the freezing of deposits and borrowing did not impede older depositors from making withdrawals. Instead, it only halted new deposits and borrowing requests. However, in a December 2023 post on the AaveDAO forums, Bored Ghost Developing Labs (BGD Labs) revealed an underlying issue obstructing withdrawals. They claimed to have found a flaw in the pool contract that had led to the depletion of funds within it. Consequently, there was insufficient liquidity available to facilitate the processing of withdrawal requests.

The Ampleforth team suggested a solution to the ongoing issue by recommending that AaveDAO buy AMPL tokens and give them to users as part of a compensation plan. However, Aave developers proposed an alternative idea to distribute stablecoins instead. Furthermore, they requested that the Ampleforth team contribute 40% of the total compensation fund. As of now, the Ampleforth team has not decided whether to provide these funds yet, but they have committed to assisting in finding a resolution to the problem.

On March 31, BGD Labs suggested making an initial payment of $300,000 in USD Coin (USDC) to depositors. They mentioned that the rest might be paid out following more discussions. Yet, the debate wasn’t entirely settled. Regardless, on April 5, the proposal gained approval with over 99.9% of votes in its favor.

AMPL depositors complain of frozen funds on Aave

Aave developers discover liquidity problems for AMPL

When depositing funds into Aave’s lending pool as outlined in their GitHub documentation, tokenholders will be given an equivalent value of “aTokens.” These aTokens act as proof of deposit. As the pool accumulates interest, depositors will receive extra aTokens reflecting their proportionate share of these earnings.

Despite BGD Labs’ assertion, the AMPL pool contract from their lab seems to have an issue. This problem leads to excessive distribution of aAMPL tokens relative to the actual amount of AMPL in the pool. Consequently, insufficient AMPL remains in the pool for depositors to withdraw their funds. In simpler terms, more aAMPL is being given out than there is real AMPL in the pool, making it impossible for depositors to take out their initial investment.

“The aToken supply of the asset appeared to be way more than it should, bigger than the sum of the variable debt plus available liquidity. […] The aAMPL supply is currently not representative of the claims over AMPL underlying. […] As the utilisation is 100%, no withdrawals can be executed, only repayments and liquidations.”

BGD Labs claimed that Ampleforth developers designed and wrote the contract, not AaveDAO contractors. It claimed to have reached out to the Ampleforth team and asked it to determine how much AMPL was owed to each depositor. BGD Labs asked depositors to be patient while the Ampleforth team attempted to come up with a solution to the problem.

Ampleforth proposes token buyback by Aave collector

On January 31st, Ahmed Naguib Aly from Ampleforth, who goes by “Naguib” in the Aave governance forum, acknowledged the issue and shared that the team was actively working on finding a solution. They were collaborating with Chaos Labs and Gauntlet from the AaveDAO to resolve the problem effectively. On March 8th, Naguib provided a comprehensive explanation of the issue and suggested a possible remedy. According to his assessment, some depositors had withdrawn their funds before the excessive interest payments were identified, which resulted in a shortfall for the pool and depleted its resources.

“More interest was credited to depositors than was charged from borrowers. This discrepancy has led to situations where some depositors were able to withdraw more than what should have been possible under normal circumstances. As a direct consequence, we’re now facing a liquidity shortfall, preventing current depositors from withdrawing their funds.”

Naguib stated that it was challenging for Ampleforth to figure out the exact amount of AMPL each depositor should have received during that specific period. Yet, he believed the team would arrive at a solution by March 22.

Naguib pointed out that the Aave protocol holds certain tokens within its “Aave collector” account. Once the exact amount of AMPL each depositor is owed is determined, these tokens can be employed to repay users, suggested Naguib. An estimated maximum of 715,335 AMPL (equivalent to roughly $1.3 million based on March 8 pricing) would suffice to cover all compensations. Naguib proposed that AaveDAO buys AMPL tokens from the open market using these reserves, which will later be dispersed to depositors through a future-built contract.

On March 17th, Naguib announced that he was withdrawing his proposition, explaining that BGD Labs had expressed disagreement with it. He added that BGD Labs had communicated their preference for an alternative solution and intended to put forward their proposal instead.

Aave developers propose stablecoin compensation

On March 21st, BGD Labs and Chaos Labs from Aave presented a unified plan to reimburse depositors. They calculated the deficit to be around 533,973 AMPL tokens, equivalent to roughly $1 million based on the token price at that time.

instead of buying AMPL, depositors should receive compensation based on the average USD value of AMPL over the previous four months since the Nov. 22 freeze. This would equal $1.198 per AMPL or a total of $639,700, which could be distributed in stablecoins like USDC.

Ampleforth and Chaos Labs, along with BGD Labs, proposed that Ampleforth contributes 40% of the required funds to reimburse depositors, while AaveDAO covers the remaining 60%.

“Considering that the problem is on a contract of Aave, but that the implementation was done by the Ampleforth team, we propose a 60% (Aave) 40% (Ampleforth) split on the total to be deposited on the smart contract for the distribution.”

Many forum members voiced their opposition to the new proposal. They argued that giving depositors stablecoins as compensation was unfair. User Fiddlekins explained in a post that the proposal involved paying AMPL holders less than the market rate in USDC instead of the actual AMPL. This was deemed unjust since it would shift the responsibility of price impact onto the depositors if they chose to buy back AMPL with the USDC, and it denied them the chance to sell their asset for its current high value if they didn’t.

Fiddlekins mentioned that AaveDAO sold 283,500 aAMPL of its reserves on Jan. 23, receiving $363,000 in exchange, which the user considered to be inconsistent with the view that AMPL is too high of a price to buy back. “Put bluntly: the DAO seems happy to sell low but not to buy high, and argues that lenders should bear the brunt of that,” they said.

Some critics raised concerns over the proposed 60-40 funding allocation between AaveDAO and Ampleforth. RomanPope questioned, “Why would Ampleforth DAO transfer funds if there are issues with Aave’s smart contract?” In counterargument, QuantumEvolver pointed out that both parties were at fault. He stated, “The Ampleforth developers initially made a mistake in their smart contract design. However, Aave should have conducted a thorough audit before integrating it into their platform to ensure proper functionality.”

BGD Labs proposes $300,000 compensation plan

On March 31, BGD Labs suggested a new plan: AaveDAO would distribute $300,000 worth of stablecoins to depositors, using funds from its reserves in the Aave collector contract. They explained that this action was required due to the lack of information from Ampleforth. If Ampleforth intends to join the compensation plan at a later time, BGD Labs requested that they share this intention in this forum. Such a contribution, they added, is technically feasible.

The proposal was confirmed by a vote of over 99% on April 5.

According to BGD Labs’ announcement about the proposal, the depositors are expected to receive over $300,000 in repayment. This suggests that additional distributions may be necessary post-approval to fully reimburse the depositors.

Ampleforth’s response

On the 7th of April, Naguib released a statement intending to clarify Ampleforth’s stance regarding the issue at hand. He disclosed that the team discovered the inaccurate interest payments in May 2022. At that point, “the difference was insignificant, far less than the AMPL reserve fund.” During this period, Aave was preparing to upgrade to version 3, and both teams decided to temporarily halt the pool’s activities until the transition was finished.

Naguib stated that there was consensus among the group that AaveDAO could utilize its AMPL reserves as a safety net to make up for any financial deficits, should the platform become insolvent prior to all depositors having withdrawn their funds.

Following our conversation, deposits and borrowing were halted for the AMPL pool on November 22, 2022. However, on November 25, deposits were allowed once again, resulting in a larger deficit for the pool in the long run. Later, on January 23, 2023, AaveDAO liquidated its AMPL reserves. This action made it significantly harder for AaveDAo to address the deficit, a fact that was initially unknown to Ampleforth.

When the Ampleforth team discovered that the shortfall had significantly increased, they proposed a solution they believed to be “straightforward and uncontentious.” This involved selecting a date prior to the exponential growth of the discrepancy and assuming that lenders had been holding AMPL since then. By carrying out this calculation, a compensation package could have been generated promptly, which could have been funded through a combination of AaveDAO reserves and Ampleforth funds. Naguib stated that this suggestion was shared confidentially with the BGD Labs team.

According to reports, BGD Labs declined Ampleforth’s proposal and requested an alternative approach instead. They asked Ampleforth to estimate the amount due using off-line trials of AAVE platform operations as a reference. Although this method took more time, it eventually resulted in Ampleforth presenting a buyback plan for AaveDAO to purchase back AMPL on March 8 for repaying depositors.

Naguib expressed that the Ampleforth team would continue providing assistance for investigations and helping BGD Labs come up with a community-approved proposal. At the same time, he emphasized that BGD Labs should take charge of finding a solution since they are considered most capable of handling the task.

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2024-04-10 13:25