Curve Finance is a leading decentralized exchange in DeFi and one of the main hubs for stablecoin trading and lending.
On July 30, Curve was exploited due to a vulnerability in the Vyper programming language, resulting in around $70 million being stolen. This exploit has raised concerns about the collateralized loans taken out by Curve founder Michael Egorov, who has borrowed over $100M against approximately 460M CRV tokens, representing 47% of the total supply. A drop in the price of CRV could lead to a liquidation of Egorov’s position and kickstart a liquidation cascade.
This explainer will cover:
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The risky loans at stake.
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The attempts to prevent liquidation.
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Contagion risks and the outlook for DeFi.
Egorov's Risky Loans
Curve Finance founder Egorov has taken full advantage of the fact that the CRV governance token is accepted as collateral across different DeFi protocols. He collateralized 460M CRV to take out $110M in stablecoin loans. However, the 460M CRV represents 47% of the total supply, resulting in a systemic risk if the loan were ever to be liquidated.
Egorov’s loans spread across a $63M loan from Aave, collateralized by 34% of the CRV supply.
This loan is at risk of being liquidated, with a liquidation price of 0.3767 CRV/USDT.
An even bigger risk is Egorov’s loan from Fraxlend worth $19.5 million. Due to the particular interest rate mechanism of Fraxlend, the APY on the loan doubles every 12 hours. The interest rate is already extremely high at over 80% APY and could reach 10,000% APY within a few days.
Egorov's loans across protocols are risky on two fronts - the possibility of CRV price decline triggering liquidations across the board, and the runaway interest rate on the Fraxlend loan increasing liquidation risk regardless of price action. Both scenarios could force the sale of a substantial portion of the CRV supply.
Contagion Risks
If Egorov's loans are liquidated, it risks triggering a cascading crisis across multiple protocols in DeFi. Several platforms accept CRV as collateral, including Aave, Abracadabra, Fraxlend, Inverse Finance and Silo Finance.
A collapse in CRV price would likely force these protocols to begin liquidating the CRV collateral backing loans on their platforms. However, with minimal liquidity, these mass liquidations could rapidly wipe out the CRV value.
Protocols forced to liquidate CRV collateral at fire sale prices would likely have to absorb substantial bad debt. Those that isolated risk, like Fraxlend and Aave V3, would see losses contained to CRV lenders.
But losses may spread more widely from protocols like Aave V2 that didn't isolate risk. There is also exposure for stablecoins like Abracadabra's MIM that hold CRV in collateral baskets.