Depositors who have invested in Ampleforth’s AMPL stablecoin have reported that their funds are frozen on the popular decentralized finance (DeFi) platform Aave. This issue, which has been ongoing since December 2023, has prevented AMPL depositors from withdrawing their assets from Aave. However, other DeFi pools on Aave are unaffected by this problem.
AMPL is a stablecoin designed to track the value of the U.S. dollar adjusted for inflation. The protocol adjusts the number of tokens available based on whether its price matches its target value.
In November 2022, Aave experienced an alleged market manipulation attack on its Curve (CRV) pool. Although the attack did not result in any profits for the attacker, it caused $1.6 million of bad debt for the protocol. As a response, AaveDAO, the governance body of Aave, voted to freeze deposits and borrows for 17 different tokens, including AMPL.
However, in December 2023, Bored Ghost Developing Labs (BGD Labs), a development team contributing to the Aave protocol, discovered an additional problem that was preventing withdrawals. They found a bug in the pool contract that allowed it to be drained of funds, resulting in insufficient liquidity to process withdrawals.
In light of this issue, a representative from Ampleforth suggested that AaveDAO should purchase AMPL tokens and distribute them to users as compensation. However, Aave developers proposed an alternative solution of paying out stablecoins instead of AMPL. They also requested that the Ampleforth team contribute 40% of the compensation package from its own funds. At the time of writing, Ampleforth has not confirmed whether it will provide these funds but has expressed its commitment to resolving the problem.
On March 31, BGD Labs proposed a compensation plan of $300,000 worth of USD Coin (USDC) to be paid to depositors. This amount was considered an initial distribution, and further debate would determine whether additional payments were necessary. The proposal was passed on April 5 with over 99.9% of votes in favor.
According to Aave’s GitHub documents, depositors should receive “aTokens” equivalent to the funds they deposit into the lending pool. These aTokens serve as deposit receipts and represent the share of interest payments that depositors should receive as the pool accrues interest.
BGD Labs claimed that the AMPL pool contract was not functioning as intended. It had a flaw that caused it to pay out more AMPL aTokens (aAMPL) than the actual amount of underlying AMPL available. As a result, there was insufficient AMPL in the pool to facilitate withdrawals.
Ampleforth developers were responsible for designing and writing the contract, not AaveDAO contractors, according to BGD Labs. They reached out to the Ampleforth team to determine the amount of AMPL owed to each depositor and requested depositors to be patient while Ampleforth worked on a solution.
Ampleforth developer Ahmed Naguib Aly, known as “Naguib,” acknowledged the problem and stated that the team was working to resolve it. He mentioned coordination with AaveDAO risk managers Chaos Labs and Gauntlet to find an effective solution. Naguib provided a detailed assessment of the problem and proposed a solution on March 8. He identified the shortfall in the pool caused by early withdrawals before the excessive interest payments were detected. These early withdrawals had depleted the pool of funds.
Naguib suggested that AaveDAO use its AMPL reserves held in the “Aave collector” contract to reimburse users once the correct amounts of AMPL owed to each depositor were determined. He estimated that 715,335 AMPL would be needed to fully compensate users and proposed that AaveDAO purchase AMPL on the open market for distribution.
However, on March 17, Naguib withdrew his proposal after BGD Labs disagreed with it. BGD Labs proposed an alternative resolution and requested off-chain simulations of Aave platform behavior to calculate the amount owed to depositors.
On March 21, BGD Labs and Chaos Labs introduced a joint proposal to compensate depositors. They estimated the shortfall at 533,973 AMPL and suggested compensating depositors based on the average U.S. dollar value of AMPL over the four-month period since the freeze. They proposed a total compensation of $639,700 to be paid out in stablecoins such as USDC. They also recommended that Ampleforth contribute 40% of the funds, with AaveDAO covering the remaining 60%.
This new proposal faced criticism from some forum participants who believed it was unfair for depositors to receive stablecoins instead of actual AMPL. They argued that repaying depositors in stablecoins would transfer the burden of price impact to them if they wished to rebuy AMPL and would deny them the ability to sell the asset at its current elevated price.
Other critics questioned the 60%/40% funding split between AaveDAO and Ampleforth. They argued that AaveDAO should bear the responsibility for any issues with its smart contract. Some participants noted that AaveDAO had sold a portion of its reserves earlier, which contradicted the view that AMPL was too expensive to buy back.
In response to the ongoing debate, BGD Labs proposed a compensation plan on March 31, suggesting that AaveDAO pay out $300,000 in stablecoins to depositors using its reserves held in the Aave collector contract. They stated that this proposal was necessary due to the lack of communication from the Ampleforth team. However, BGD Labs mentioned that Ampleforth could still contribute to the compensation plan in the future.
On April 5, the proposal was approved by over 99% of the votes.
Ampleforth’s Naguib posted a statement on April 7, explaining the team’s position. He mentioned that the team became aware of the incorrect interest payments in May 2022 but considered the discrepancy to be small at that time. Aave and Ampleforth agreed to freeze the pool until the transition to Aave version 3 was completed. They also agreed that AaveDAO would use its AMPL reserves to cover any shortfalls if it became insolvent before all depositors withdrew.
However, deposits were reenabled on Nov. 25, 2022, leading to a larger shortfall over time. Naguib claimed that Ampleforth was initially unaware of these events. When they realized the extent of the shortfall, they proposed a quick compensation calculation based on a specific date before the discrepancy started growing exponentially. This proposal could have been covered by a combination of AaveDAO reserves and Ampleforth funds. However, BGD Labs rejected this suggestion and requested off-chain simulations instead.
Naguib stated that Ampleforth would continue supporting the investigation and BGD Labs in reaching a resolution. However, they believed that BGD Labs should take the lead in finding a solution as they were best positioned to do so.