Curve’s Possible DeFi Contagion
Yesterday Curve was attacked - CRV/ETH was one of the pools. Hacker took control of 8% of circ supply of CRV tokens
CRV founder took a debt months ago $100 million, backed by 47% of the entire CRV circulating supply, against his CRV tokens across multiple protocols - Aave, Frax, etc.
Hacker selling his tokens would drive down the price
CRV price going down could trigger a cascade of liquidation on every protocol which accepts CRV as collateral – especially Egorov’s giant positions.
A look at the different positions:
Aave has the largest one - $70 million, or 34% of the circulating supply. Liquidation price is $0.376
Frax - due to the protocol’s time-weighted variable interest rate, the interest rate goes up with loan utilization rate (which goes up as the price goes down), so Egorov is liable for more and more interest.
The situation is quickly developing.
Yesterday, Curve experienced a security breach targeting Vyper, a smart contract language and compiler for EVM applications, which led to a “zero-day vulnerability”. The attacker displaced an estimated $70 million of CRV, or 8% of the circulating supply. While some of this had been salvaged by white-hat hackers, the hacker sadly still has the majority of the funds.
Unfortunately, it looks like the story is not over yet. The CRV collapse continues, with other protocols including Aave and Frax facing the risk of being affected by the spreading impact.
Curve Founder’s Bad Debt
A few months ago, CRV founder Michael Egorov took a collateralized debt of $110 million, backed by 460M CRV tokens, or 47% of the entire CRV circulating supply. The debt was made across multiple protocols including Aave and Frax. Egorov chose this method rather than selling CRV directly, a decision that drew backlash from the community.
The attack yesterday drained most of the CRV/ETH, a primary liquidity pool for CRV. As the price of CRV crashes rapidly, Egorov’s loans are at risk of being liquidated.
Aave
His largest position is on Aave, where Egorov backs a $63.2 million USDT loan with 305 million CRV, or 34% of circulating supply. The liquidation price of this loan is $0.376. At the time of this writing, CRV is trading at $0.50. Should the hacker sell out of his 7 million CRV position, the price of CRV is likely to drop below the liquidation price
Frax Finance
Egorov’s second largest position is on Frax Finance. He currently has 59m $CRV supplied against 15.8m FRAX of debt.
FraxFinance poses a greater risk to CRV due to its Time-Weighted Variable Interest Rate, despite being a smaller position. In Frax’s case, interest rate adjusts over time based on loan utilization rate. In case of a Curve selloff, the loan utilization rate will increase due to a decrease in collateral value.
At 100% utilization, which it currently is at, interest rate would double every12 hours, leading to an eventual liquidation, regardless of CRV price. The current interest rate is 81.20%, but can be expected to increase to the maximum of nearly 10,000% APY after just 3.5 days.
Egorov has tried to lower his debt and the utilization rate but to no avail, as the market’s utilization rate remains at 100%.
Other Protocols
The rest of Egorov’s positions are in Abracadabra, Inverse, Convex, and Silo, all nearing liquidation
What’s Next
Currently, all DeFi protocols that accept CRV as collateral are at risk of contagion. This is a quickly developing story. We will keep you updated as it unfolds. Meanwhile, you can check updated news at: https://app.coinfeeds.io/coins/curve-dao-token