How does DeFi effectively deal with market turmoil after Bybit hacking?

Author:Omer Goldberg , founder of Chaos Labs

Source: Omer Goldberg X Account

Compiled by: Yuliya, PANews

After Bybit was hit by $1.4 billion hacking, the cryptocurrency market faces a serious shock. How DeFi (decentralized finance) platforms cope with the largest hacking incident in history, as well as potential contagious risks and USDe price fluctuations have become the crypto field Focus of attention. This article will explore in-depth the impact of the attack on Aave, Ethena and USDe, analyze how the DeFi system responds to this incident, and explore whether Proof of Reserves can prevent liquidation of more than $20 million.

After the attack, the Chaos Labs team formed an emergency team with bgdlabs, AaveChan and LlamaRisk to assess the risks and systemic risks Aave faces.

The emergency team focused on several core issues: Bybit's solvency status, the possibility of a larger-scale attack, and the impact of any bankruptcy or write-down that could have on Aave given the exposure of sUSDe.

Ethena Labs confirmed its funds were escrowed through Copper.co , but the market remains concerned about the possible ripple effect of Bybit's failure to cash in on the profit and loss, and whether USDe will face deeper risk of decoupling.

Analysis of Bybit's bankruptcy risks shows that there are three main hidden dangers: exposure risk caused by the failure of USDe hedging, chain liquidation risk caused by the decline in ETH prices, and potential DeFi contagion risk.

This prompts the parties to accurately quantify the losses to decide whether to take measures such as freezing the sUSDe market. Through the transparency dashboard, Ethena's ETH configuration in Bybit can be seen, while Ethena Labs' collateral is securely stored off-site Copper.co . This hosting solution and off-site settlement mechanism enable Ethena and USDe to effectively circumvent. Similar to the risk of bankruptcy on the FTX exchange.

Ethena may face unheld $100 million in the assumption that the $400 million "book" nominal ETH position cannot be closed and the ETH price has fallen 25% before Copper.co releases funds. However, considering the $60 million insurance fund, USDe's total support loss is expected to be only 0.5%.

Based on the judgment that risks are relatively controllable, Aave has prepared risk response plans and continuously monitors developments.

In terms of price, USDe has obvious price deviations in different trading venues. On the Bybit platform, USDe/USDT fell to $0.96 at one point due to panic selling and lack of instant arbitrage.

In contrast, on-chain pricing performed more stably, with only briefly decoupling to $0.994 and soon recovered through arbitrage. This difference mainly stems from the role of redemption mechanisms and oracles.

Unlike CeFi, USDe's redemption can be carried out continuously and atomically on-chain through Mint and Redeem contracts. USDe's on-chain redemption mechanism runs smoothly, and a $117 million redemption was completed within a few hours. Ethena Labs also raised the redemption buffer to $250 million and maintained price stability through continuous supplementation until USDe resumes anchoring. Due to the atomization nature of USDe redemption, whitelisted redeemers quickly bridge the spread on Curve.

However, the oracle abnormality amplifies market risks. Chainlink's USDe/USD price oracle deviates from on-chain prices and drops to $0.977, although the redemption mechanism is still operating normally.

This deviation led to a $22 million liquidation on Aave, and traders were liquidated due to secondary market price fluctuations, despite the good mortgage of their USDe assets.

This highlights the improvement of the oracle mechanism, and an intelligent data source integrating reserve proofs may be able to provide more accurate USDe valuations and avoid unnecessary liquidation. Consider real-time redemption, rather than relying solely on weighted average transaction prices. Such intelligent oracle can:

• Prevent unnecessary liquidation;
• Maintain capital efficiency;
• Reduce market pressure

Where can I improve it?

Risk, price and reserve proof data must work together rather than exist in isolation to ensure value and maintain the resilience of the DeFi system under pressure. Price oracles should reflect real collateral support, not just secondary market prices.

Overall, the DeFi ecosystem has withstood this stress test. Bybit’s team stabilized the market by maintaining transparent communication, the Ethena Labs team quickly eliminated risk exposure and ensured redemption smoothly, while Aave effectively controlled the risk without creating bad debts.

This event shows that in order to build more resilient systems, the industry needs smarter oracles and risk-aware infrastructure to improve capital efficiency while ensuring security. It’s only a matter of time before the next major stress test arrives, and the industry needs to prepare for the future.