The Binance Hacker's $60 Million Aave Loan Is Close to Liquidation. What Would a Forced Sale Do to Ethereum?

The hacker involved in the Binance incident is facing the potential liquidation of a substantial $60 million loan on the Aave platform. This situation has raised concerns regarding the implications for Ethereum's market, especially given the hacker's significant holdings. According to blockchain analytics company Elliptic, the hacker possesses approximately 519,104 ETH, which is currently valued at around $1.17 billion.

As of the latest data, Ethereum is trading at $2,255, reflecting a 1.0% increase over the past 24 hours, despite a notable 16.6% decline over the last month. On October 30, Ethereum closed at $2,243, marking its lowest closing price in the past 30 days. The question now is: what impact would a forced liquidation have on Ethereum's value? Analysis suggests that such a liquidation would necessitate the purchase of ETH.

The loan in question was secured through Aave, which allows users to leverage cryptocurrencies as collateral in order to borrow other digital assets. Elliptic reports that the hacker deposited 59.9 million Tether (USDT), a stablecoin pegged to the U.S. dollar, and borrowed 19,762 ETH, amounting to roughly $45 million. Liquidation occurs when the value of the collateral falls below the threshold required to support the borrowed amount. Typically, in the crypto lending space, collateral is volatile while debt is stable. However, this case is unique due to the stable nature of the collateral and the debt being in ETH.

As the price of ETH rises, the risk associated with the loan increases, as the cost to repay the borrowed amount grows. If the loan surpasses its limits, a liquidator, often an automated trading bot or a trader seeking distressed assets, will step in to pay off the ETH debt in exchange for the USDT collateral at a discounted rate. This process means that the liquidator must either purchase ETH or already possess it, leading to increased demand for ETH in the event of a liquidation.

On October 30, Aave resumed its markets after a brief suspension. LlamaRisk, a firm specializing in risk management for Aave, detailed that the reopening occurred in four phases and resulted in the removal of about $3.7 billion in unused borrowing capacity from its older market and $130 million from the newer market. Additionally, LlamaRisk established a zero loan-to-value ratio for nine assets, including USDT and WAVAX, meaning these tokens cannot be used as collateral for new loans. Data from DefiLlama indicates that the total value locked in decentralized finance (DeFi) applications fell by 5.3% to $84 billion on October 30, marking the lowest level since August 21.

Ethereum's current trading metrics show a 20-day simple moving average of $2,393, which is 6.1% higher than its current price, and a 50-day average of $2,526, reflecting a 12% increase. This data suggests that sellers have gained control over the market throughout October. Moreover, Ethereum's price remains 4.5% above its 200-day average of $2,159, indicating a long-term upward trend.

The nearest resistance level for Ethereum is $2,276, only 0.9% above its current trading price, where sellers have previously emerged. Demand for Ethereum also appears to be waning, as spot Ethereum ETFs, which directly hold ETH for stock market investors, experienced a loss of $156 million on October 30. The hacker's holdings account for approximately 22% of Ethereum's trading volume in the past 24 hours, a figure that has increased due to lower trading activity over the weekend. In contrast, Bitcoin saw an 8.6% drop during the same timeframe. While it is difficult to attribute Ethereum's market troubles solely to the hacker's actions, other cryptocurrencies like Solana and Avalanche have experienced even larger declines without facing a similar overhang.

In evaluating the risks to Ethereum, it appears that the hacker's extensive ETH holdings may pose a greater threat to the market than the impending liquidation of the Aave loan. While a forced sale could involve purchasing up to 19,762 ETH, valued at around $45 million, the hacker's total ETH holdings are worth about $1.17 billion. The hacker previously incurred a loss of 12% to 26% when converting 434 million USDT into 160,451 ETH, moving out of a stablecoin that could potentially be frozen and into decentralized ETH.

It is common for stolen cryptocurrencies to eventually be converted into cash. Therefore, a holder with such a significant ETH position could quickly become a seller with little notice. If wallets associated with the hacker begin transferring ETH to exchanges and the price of Ethereum falls below $2,243, there could be increased selling pressure on the market.

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