Curve Finance, a prominent decentralized finance (DeFi) protocol, is grappling with the aftermath of a recent $47 million hack. However, another pressing issue has surfaced, raising concerns among holders of the protocol’s native token, Curve DAO (CRV). On August 1, crypto research firm Delphi Digital published a Twitter thread that shed light on loans taken by Curve Finance founder Michael Egorov.
These loans, backed by a substantial portion of the circulating supply of CRV, have triggered theories on the potential for a massive token dump. The situation has attracted significant attention within the cryptocurrency community, with comparisons being drawn to other notable figures using tokens as collateral and debates about its impact on the broader DeFi industry.
Curve Finance loans and their implications
Delphi Digital’s research revealed that Michael Egorov has accumulated loans totaling around $100 million across various lending protocols, all backed by a staggering 427.5 million CRV. The scale of this loan exposure has raised concerns among investors, as it represents a significant portion of the total CRV token supply. One particular loan on Aave involves 305 million CRV collateralizing a 63.2 million Tether debt. Delphi Digital pointed out that this position is at risk of liquidation if the CRV token’s price drops by 36% from its current value of $0.5975. At the liquidation threshold of 55%, the loan could be liquidated at a price as low as $0.3767.
Moreover, Michael Egorov has taken out another loan on Frax Finance, this time involving 59 million CRV supporting a debt of 15.8 million Frax. While the loan amount is lower than the Aave loan, the situation is more precarious due to Fraxlend’s time-weighted variable interest rate. With the loan already at 100% utilization, the interest rate for this loan doubles every 12 hours, creating significant risks for the borrower. While the current interest rate is 81.2%, Delphi Digital warned that it could skyrocket to as high as 10,000% within just 3.5 days. This could lead to liquidation regardless of the CRV token’s price.
Efforts to address the risks
Recognizing the dangers posed by the accumulated debts and the potential for a CRV token dump, Curve Finance’s founder has already taken steps to lower the debt and utilization rate. In the last 24 hours, he paid a total of 4 million FRAX to decrease the risk associated with the Frax Finance loan. However, the move triggered quick responses from users who rushed to remove liquidity from the platform.
To address the liquidity issue, Egorov deployed a Curve pool to incentivize liquidity toward the lending market. This initiative saw the pool gain $2 million in liquidity just four hours after its launch, which resulted in a decrease in the utilization rate from 100% to 89%. While this measure offers some relief, it remains to be seen how effective it will be in the long term, given the magnitude of the outstanding debts.
Community reactions and industry impact
The revelation of Curve Finance founder’s substantial loan exposure and the subsequent efforts to manage the risks have sparked debates within the cryptocurrency community. Some members have drawn comparisons to other notable figures, like FTX founder Sam Bankman-Fried, who have used tokens as collateral, while others view it as a potential black eye for the DeFi industry. Curve Finance’s situation has raised concerns about the stability of DeFi protocols and the risks involved in using tokens as collateral for substantial loans.
The potential for a massive CRV token dump could have significant repercussions for both Curve Finance and the broader DeFi industry. Such an event may cause a drop in the CRV token’s price, eroding investor confidence and spooking those considering entry into the DeFi space. Moreover, the episode may attract regulatory scrutiny, leading to increased oversight and stricter regulations for DeFi protocols and lending platforms.
