USDP briefly spikes to $1.28, costing an Aave trader $529k

The liquidation occurred on the decentralized finance (defi) platform Aave, where the trader had used USDP as collateral to secure a loan in USDC. Notably, in the defi ecosystem, loans are backed by other assets, with mechanisms in place to manage sudden shifts in market dynamics.

On-chain data confirms that the trader lost the 529,000 USDC across sixteen uneven transactions from 16:16 to 20:09 UTC, coinciding with the period USDP lost its peg. The transaction label indicates that the liquidation process was automatically initiated by Aave’s built-in risk management algorithms.

While the USDP value spiked, the platform likely predicted a possible correction or a return to its normal pegged rate. Such a forecast can prompt preemptive liquidation to mitigate potential losses, especially if the borrower’s loan-to-value (LTV) ratio becomes unfavorable.

Issued by Paxos, USDP has faced certain setbacks in recent times, marked by occasional depegs. A 2023 research from SP Global suggested that USDP records the highest deviations from the U.S. dollar among the top stablecoins, having witnessed 7,581 mild depeg events in the 24 months leading to June 2023.