What is AAVE Protocol?

Aave is an Ethereum-based protocol that offers automated crypto loans. Users can deposit cryptocurrency as collateral and borrow other cryptocurrencies, up to a certain percentage of the collateral value.

Actually, Aave is a decentralized non-custodial liquidity protocol where users can participate as depositors or borrowers. Depositors provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized (perpetually) or undercollateralized (one-block liquidity) fashion. (Read More)

What is BUSD?

BUSD is a 1:1 USD-backed stablecoin approved by New York State Department of Financial Services and issued by Paxos on Ethereum that was launched in 2019 by Binance and Paxos. Binance provides Binance-Peg BUSD on other chains by locking an equivalent amount of assets on Ethereum. Currently, BUSD is the third largest stablecoin in the market with a total supply of over $16 billion.

Background

on Monday, Feb. 13, 2023, The New York Department of Financial Services (NYDFS) ordered crypto infrastructure firm Paxos to stop issuing the stablecoin Binance USD (BUSD).

"Paxos has informed us that they have been directed to cease minting new BUSD by the New York Department of Financial Services (NYDFS)," they said. "BUSD is a stablecoin wholly owned and managed by Paxos. As a result, BUSD market cap will only decrease over time. Paxos will continue to service the product, manage redemptions, and will follow up with additional information as required."

The Wall Street Journal first reported the news. The move comes after CoinDesk reported on Friday that the NYDFS is investigating Paxos.

Paxos announced that it will cease the issuance of new BUSD stablecoins effective Feb. 21. As for BUSD redemptions, the company said it will honor them "through at least February 2024."

"New and existing Paxos customers will be able to redeem their funds in US dollars or convert their BUSD tokens to Pax Dollar (USDP), a regulated US dollar-backed stablecoin also issued by Paxos Trust," the company said.

It went on to say that USDP, pax gold (PAXG) and its business remain unaffected by the NYDFS order.

The U.S. Securities and Exchange Commission is also reportedly planning to sue Paxos over BUSD, alleging that the stablecoin is an unregistered security, the WSJ reported on Sunday. The SEC sent Paxos a letter informing it of “a possible enforcement action,” per the report, citing anonymous sources. The suit is reportedly for "violating investor protection laws."

Source

This caused almost severe volatiles in the Cryptocurrency market, especially BNB currency (Binance exchange native token). Also, liquidity and trading positions related to BUSD currency in various blockchain protocols were also affected by these events.

Aave To Freeze BUSD Reserves On Ethereum:

The Decentralized Autonomous Organization (DAO) for Aave Protocol is weighing a proposal to freeze BUSD reserves following news that Paxos Global will stop minting the Binance-branded stablecoin on Ethereum.

The proposal from Marc Zeller of Aave Chan Initiative states that the circulating supply of BUSD will eventually go toward zero because in the future Paxos will only allow redemption of BUSD in exchange for burning BUSD.

The proposal states BUSD is not an asset with borrowing power on Aave and does not present an “immediate risk for the protocol.”

“It seems that the most reasonable path for Aave is to freeze this reserve and invite users to switch to another stablecoin among the diversity present in Aave,” Marc said.

Moreover, since there is no genuine prospect of growth or utility for the stablecoin, it seemed that the fairest course of action for Aave would be to freeze its reserve and ask users to convert to another stablecoin among the variety offered by the protocol.

Source:

Methodology

In this dashboard and on the occasion of the above issues around BUSD & AAVE, I am going to analyze the BUSD activity on AAVE protocol from February 1st, 2023 till Today (February 23rd, 2023).

For this purpose, I am going to analyze:

• BUSD Inflow/ Outflow / Net Flow in AAVE.
• BUSD Market Liquidity & Utilization Rate in AAVE.
• BUSD Borrowing Activity in AAVE.
• BUSD Deposit Activity in AAVE.
• BUSD Repayment Activity in AAVE.
• BUSD Withdrawal Activity in AAVE

The main tables That I am going to use for this dashboard are Flipside’s ethereum.aave. tables. I am going to filter the symbol (related asset) to ‘BUSD’ and also filter the block_timestamp to 2023-02-01 on.

Moreover, Since the stories around BUSD & Paxos have been started since Monday, Feb. 13, 2023, I am going to separate the timespan for this analysis into two parts, Before & After this day.

BUSD Inflow/ Outflow & Net Flow in AAVE

• Inflows: Deposits + Repayments
• Outflows: Withdrawals + Borrows
• Net Flow: Inflow - Outflow

According to the above data, During February 2023, there was a total of 29.2M $BUSD inflowed to the AAVE and on the other hand 32.3M $BUSD was removed from this protocol. So, the total net flow of $BUSD in AAVE protocol is -3.14M.

On the other hand, we can barely see any inflow & outflow of $BUSD in AAVE protocol before 13th February (BUSD-PAX Issues) but after this date, we can see the significantly increased activity of both $BUSD Inflows & Outflows in AAVE protocol over time, especially in the first day (13th February). on this day, the highest $BUSD was outflowed from AAVE protocol that resulted in the negative net flow of this asset in AAVE during February.

BUSD Market Liquidity & Utilization Rate in AAVE

According to the above-left chart, the BUSD market liquidity in AAVE protocol was around 9M before Monday, 13th February but after this date and immediately after BUSD-PAX issues has begun, we can see a heavy decline in liquidity of this token in AAVE protocol to 7.6M which is decreasing more and more as time goes on to the extent that the liquidity of BUSD market in AAVE is currently down to 6.13M on 23rd February. So, The BUSD liquidity in AAVE has decreased by almost 20% after BUSD-PAX issues.

Moreover, on the right chart, we can see the daily change in the BUSD utilization rate in the AAVE protocol. As we see, there is a high spike in the BUSD Utilization rate during the first day of the PAX-BUSD issue which is negative news for this asset. The main reason behind this high spike in Utilization Rate is the withdrawal pressure of $BUSD from the AAVE protocol.

> Each currency reserve in AAVE is characterized by its utilization rate which represents the share of borrowed liquidity: As the Utilization Rate gets closer to 100%, the capital becomes scarcer until no liquidity is left at 100% rate. This situation can be problematic if depositors wish to withdraw their liquidity, but no funds are available.

BUSD Borrows in AAVE

According to the above data, the number and also volume of Borrow activity via $BUSD token in AAVE has also increased significantly after BUSD-PAX Issues day especially on the first day (13th February).

Meaning that this news has resulted in increasing activity of BUSD borrowing activity in AAVE protocol by borrowers.

Totally, we can see the $BUSD borrowing activity during the timespan “After BUSD-PAX Issues” is more than the timespan “Before BUSD-PAX Issues” in all terms of number of borrows, borrowers and also volume of borrows.

BUSD Deposits in AAVE

According to the above data, the number and also volume of Deposit activity via $BUSD token in AAVE has also increased significantly after BUSD-PAX Issues day, especially on the first day (13th February).

Meaning that this news has resulted in increased activity of BUSD depositing activity in AAVE protocol by depositors. However, the volume and number of $BUSD deposits are so low on all days.

Totally, we can see the $BUSD depositing activity during the timespan “After BUSD-PAX Issues” is more than the timespan “Before BUSD-PAX Issues” in all terms of the number of deposits, depositors, and also the volume of deposits.

BUSD Repayments in AAVE

Similar to the previous actions, the number and also volume of Repayments activity via $BUSD token in AAVE has also increased significantly after BUSD-PAX Issues day, especially on the first day (13th February).

Meaning that this news has resulted in increased activity of BUSD Repayments activity in AAVE protocol by payers. The number and volume of BUSD Repayments during this timespan is more than Borrows & Deposits.

Totally, we can see the $BUSD repayment activity during the timespan “After BUSD-PAX Issues” is more than the timespan “Before BUSD-PAX Issues” in all terms of the number of repayements , payers , and also the volume of repayments.

BUSD Withdrawals From AAVE

Similar to the previous actions, the number and also volume of Withdrawal activity via $BUSD token from AAVE has also increased significantly after BUSD-PAX Issues day, especially on the first day (13th February).

Meaning that this news has resulted in increased activity of BUSD Withdrawal activity in AAVE protocol by withdrawers. The number and volume of BUSD Withdrawals during this timespan is more than deposits but still less than Borrows & Repayments.

Totally, we can see the $BUSD Withdrawal activity during the timespan “After BUSD-PAX Issues” is more than the timespan “Before BUSD-PAX Issues” in all terms of the number of withdrawals, withdrawers, and also the volume of withdrawals.

Summary & Conclusion

After the stories around BUSD & PAX & SEC, Aave Lending and Borrowing Protocol has a proposal under review by its community, which is supposed to freeze BUSD reserves in the second version of Aave and not be able to withdraw. This plan is given to protect users from the risk of de-pegging this stablecoin and it is intended to encourage users to use another stablecoin.

As a result of this news, there was a significantly increased volume of removed $BUSD from AAVE protocol, especially on the main day of the news (Monday, February, 13th, 2023). This high volume of removed $BUSD from AAVE on this day has resulted in a total negative net flow of $BUSD (-3.14M $BUSD) in AAVE protocol during February 2023.

The liquidity of the $BUSD market in AAVE has decreased by almost 20% after 13th February and also the utilization rate has increased dramatically to almost 40% which are both negative news for $BUSD token in AAVE protocol.

The activity of different actions via $BUSD in AAVE protocol (Deposits, Withdrawals, Repayments, Borrows) has increased significantly after 13th February. The highest activity has happened in $BUSD Repayments followed by Borrows. $BUSD deposits were the least popular action via this token on AAVE protocol during February.

Totally, After the ruling of the New York court that it is necessary to stop the mint of BUSD stablecoin by Paxos company, we see a decrease in the market cap of BUSD over time. based on the data from Coingecko, it has been determined that within the last week, the market cap of this stablecoin has fallen from 16 billion dollars to nearly 13 billion dollars. (almost 20%)

The reduction of the market cap for a stablecoin means that its owners will convert their assets into fiat currencies by redeeming this stablecoin.

So, as we saw in the above analysis, AAVE is also one of the many DeFi protocols that $BUSD was removed from it during February 2023 and especially after Monday the 13th.

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Twitter: Alik_110

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External Sources:

Total BUSD Market Cap Over Time