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What would happen if the Curve crisis continues to escalate and leads to a complete liquidation?

23-08-01 18:28

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Original Title: "CRV Crisis Fermentation, What Will Happen Next?"

Original Source: ODAILY Star Daily

The crisis of Curve is still fermenting.

Affected by security incidents and potential liquidation risks, CRV continued to decline today, reaching a low of $0.482 at one point. As of writing, it has rebounded to $0.58, but still has a 24-hour decline of 8.13%.

At the same time, the governance tokens of major Curve ecosystem projects have also suffered heavy losses, among which Convex (CVX), which is most deeply tied, fell to a minimum of $2.884 and is currently trading at $3.034, with a 24-hour decline of 11%.

Due to the potential threat of bad debt liquidation, multiple lending projects such as Aave and Frax are also declining simultaneously. AAVE is currently trading at $64.61, with a 24-hour decline of 8.87%; FXS is currently trading at $5.69, with a 24-hour decline of 5.03%.

The continuous spread of the impact has even led to the entire DeFi sector turning towards pessimism.

CRV 危机发酵，接下来会发生什么？

Although only one day has passed, the main source of crisis for Curve has changed.

If yesterday the main risk Curve faced was the contract security threat caused by the Vyper vulnerability, today its main risk comes from the potential liquidation threat of CRV in the debt warehouses of major lending platforms, among which the health status of Curve founder Michael Egorov's personal debt warehouse is crucial.

It should be noted that these two threats are not essentially the same thing. Even without the vulnerability of Vyper, if the market continues to decline, Egorov's debt liquidation risk will eventually be exposed, but this time Vyper has brought this "hidden danger" to the surface as a trigger.

CRV 危机发酵，接下来会发生什么？

According to on-chain data, as of 3:00 PM today, Egorov has collateralized approximately 450 million CRV tokens on Aave, Fraxlend, Abracadabr, and Inverse, and borrowed approximately 105 million US dollars. The overall liquidation price of this portion of the debt warehouse is approximately 0.38 to 0.4 US dollars.

Due to the fact that 450 million CRV tokens occupy exactly half of the token's circulating supply, it can be certain that if these debt positions are liquidated, a massive amount of CRV will be dumped onto the market in a short period of time, which will inevitably deal a heavy blow to the already shaky CRV price.

Will it go into liquidation?

Since the security incident occurred yesterday, Egorov has been trying to avoid potential liquidation through various operations, such as supplementing CRV collateral, gradually repaying part of the debt, or borrowing Curve to indirectly affect the debt warehouse interest rate.

So, can these measures prevent potential liquidation?

First of all, it is important to note that Egorov's personal debt positions are spread across multiple lending platforms, including Aave, Fraxlend, Abracadabr, Inverse, and others. The size and risk profile of each debt position varies (in simple terms, these liquidations are not binary events of 0 or 1, but rather there are multiple intermediate possibilities). Among them, the debt position on Aave is the largest, but the most dangerous one is on FRAXlend.

The reason for this is because FRAXlend uses a rather unique interest rate adjustment mechanism. When the overall funds of a pool reach 85%, the interest rate will increase by a certain multiplier every 12 hours (doubling when it reaches 100%). The maximum interest rate can rise to 10000%.

CRV 危机发酵，接下来会发生什么？

Odaily Planet Daily Note: Fraxlend's interest rate multiplier when the liquidity usage rate exceeds 85%.

Due to a significant period of time from yesterday until now, the overall utilization rate of the CRV/FRAX market within Fraxlend has exceeded 85%, and even approached 100%. This has resulted in a continuous increase in the loan interest rate of the pool (according to netizens, the interest rate has reached 132% at one point), and there is a high possibility of further increase.

This also means that if the overall utilization rate of the CRV/FRAX market does not decrease in the future, Egorov will face increasingly high loan interest rates, which will also lead to the continuous expansion of its debt scale, and then continuously raise its liquidation line, exacerbating the liquidation risk of the entire debt warehouse.

Fortunately, Egorov has realized the special situation of the debt warehouse in Fraxlend. In order to reduce the utilization rate of the pool, Egorov has taken various measures. As of this afternoon, Egorov has gradually repaid $7.13 million to Fraxlend, and the size of the debt warehouse has dropped to about $10 million. The overall utilization rate of the CRV/FRAX market has also dropped to 54.78%, and the loan interest rate has dropped to 87.085%. The danger has been temporarily contained.

CRV 危机发酵，接下来会发生什么？

It is worth mentioning that during this period, Curve also launched a liquidity pool for the CRV/FRAX market on Fraxlend, called crvUSD/fFRAX. If users want to participate in this pool to obtain CRV incentives, they need to deposit in the CRV/FRAX pool within Fraxlend first, thereby reducing the overall utilization rate of the pool. This measure has also been criticized by some netizens as a centralization of power in the Egorov camp, using Curve to solve its own problems.

In summary, for the time being, Egorov seems to have some breathing room with regards to the debt position in Fraxlend. This has led to a certain rebound in the price of CRV and indirectly eased the liquidation risk of its debt positions on other platforms such as Aave, Fraxlend, and Abracadabr.

If a comprehensive liquidation really happens, what will happen?

We first confirm two points.

Firstly, apart from the pools affected by the Vyper vulnerability yesterday, the other smart contracts of Curve are still operating normally. As a leading project that has emerged from the highly competitive DeFi arena, Curve's contract quality should not be questioned too much - it is difficult for anyone to predict when bugs will appear in the underlying development language.

Secondly, the operation of the Curve protocol at the functional level and the price of CRV are related (mainly affecting incentives), but do not need to rely on the latter. In other words, even if the price of CRV drops significantly, Curve will still exist.

As for the price trend of CRV, I personally think that the possibility of a comprehensive liquidation is not very high. This is because, based on the on-chain records of Egorov's repayment to Fraxlend this afternoon, it seems that he is selling CRV off-market at a price of $0.4 (Frog Nation's former CFO 0 x Sifu revealed that the buyer will have a 6-month lock-up period), which is basically equivalent to the potential liquidation price of Egorov's debt position.

CRV 危机发酵，接下来会发生什么？

This means that some large funds in the market still have a relatively reasonable estimate of the value of CRV, and are willing to hold it for the long term at a certain discount price, even in the face of short-term liquidation risks.

Therefore, even if the liquidation really happens, perhaps CRV will really experience a short-term crash due to the instantaneous massive selling pressure, but if a lower price than the market estimate appears, potential buying pressure may help CRV gradually recover. After all, the Curve protocol is still operating solidly, and the reputation accumulated over the past two years will not completely disappear.

In the final analysis, compared with the industry benchmark Curve two days ago, today's Curve has only experienced a security incident (even the blame falls on Vyper), and although the actual losses are not insignificant, they can still be compensated for with Curve's financial reserves.

What lessons can be learned afterwards?

With the passage of time, events will eventually come to an end.

My personal assumption is that regardless of whether this settlement occurs or not, Curve will continue to exist, and CRV will gradually return to normal after experiencing various fluctuations, ultimately leading to a peaceful resolution of the situation.

At the current point in time, I would like to reflect on the roles of the three parties (Curve, Egorov, and the lending agreement) in this crisis.

First of all, when it comes to Curve, it seems difficult to make too many demands, as it is hard to detect vulnerabilities in the underlying language even with extensive auditing at the protocol level. Next, the focus for Curve may be to collaborate with other affected protocols such as Alchemix, JPEG'd, and Metronome to come up with a reasonable compensation plan.

Next is Egorov, as an individual user, there seems to be no problem with his use of the lending protocol rules to amplify the efficiency of his own funds. However, as a key figure in Curve, Egorov's operation of using the lending protocol to sell off and transfer his own financial risks to the entire community has raised suspicions among some community users (some suspect that Egorov has never considered closing his position).

As for the loan agreement, the issue of the scale limit of the debt warehouse for counterfeit coins has been a common topic in the DeFi industry. One of the concrete manifestations of the bull-bear transformation is the reduction of the liquidity of counterfeit coins, which has turned the counterfeit coin pool, once a means of attracting funds, into a source of risk. After this incident, major loan agreements are expected to pay more attention to this issue.

In terms of specific projects, Fraxlend demonstrated better resilience in this liquidation crisis through dynamic interest rate design, "forcing" Egorov to prioritize the debt warehouse issue of the platform, thereby taking the lead in reducing risk exposure and indirectly achieving "first-mover advantage" without adjusting the rules.

After this incident, some voices lamented that DeFi was over, but I don't think so. After so many years, DeFi has experienced many ups and downs. The negative impact of various events during the bear market will always be magnified. However, in the future, this may just be a relatively special hacker attack, coupled with some unhealthy borrowing and lending.