TL;DR
- Yearn Finance disclosed an incident in the yUSND vault that resulted in a 5.2% loss caused by the forced conversion of rETH in a market with limited liquidity.
- The strategy received rETH worth $78,660 and recovered only 46,800 USND, prompting Yearn to cover the shortfall with its own funds to protect user capital.
- The protocol introduced smaller-batch auctions, a price guard, and a CoW Protocol bot to reduce slippage and improve execution in future liquidations.
Yearn Finance disclosed an incident in its yUSND vault that highlights how limited liquidity can amplify losses even in strategies considered stable within the DeFi ecosystem.
What Happened to the Vault?
The event occurred on September 28 on Arbitrum and affected the rETH Stability Pool branch, which manages 28% of the vault’s capital. A liquidation granted the strategy 17.02 rETH as a reward and forced it to convert that collateral into USND to restore the pool’s composition and keep risk contained. The team launched a dutch auction that executed successive sales through WETH until reaching USND, but the market did not have enough liquidity to absorb the full volume in a short period. That shortage caused severe slippage and directly reduced the recovered value.
The strategy received rETH valued at roughly $78,660 and managed to convert it into only 46,800 USND. The vault recorded a realized loss of 25,546 USND, equivalent to a 5.2% drawdown for depositors. Yearn covered the entire amount from its multisig on October 11, so user capital was not reduced and only the potential yield that the strategy would have generated was affected. The protocol disclosed the incident on November 26, after completing its internal review and reimbursement.
The vault’s design explains the source of the problem. The yUSND vault deposits USND into Nerite’s Stability Pools, which offer rewards in USND fees, interest paid by minters, and liquid collateral from liquidations. When a pool receives rETH during a liquidation, the strategy must sell it quickly to reduce price exposure and return to the base asset. Executing the entire sale as a single batch in a market with limited liquidity increased slippage and produced the final loss.
Yearn Finance Introduced Improvements to Prevent New Incidents
Yearn implemented several upgrades after the incident. Strategies now auction collateral in smaller batches to ease liquidity pressure. Each auction starts near the market price and settles in about fifteen minutes. The platform added a price guard that stops the process when the price falls below market level and created a monitoring system to track keeper activity and auction status. In addition, Yearn runs a bot on CoW Protocol to increase buyer competition and improve execution prices.
The incident shows that even strategies with strong track records can incur losses when liquidity cannot absorb the volume sold. It also demonstrates that the protocol’s rapid response can contain damage and provide assurances to its users
