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Ethereum DeFi: Curve Concerns Threaten Major Market Crash
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Breaking News: Coinbase Confirms DOJ Investigation Following Major Security Incident

Ethereum DeFi Coins Plunge As Curve Concerns Threaten Major Market Crash

Jake Simmons
Jake Simmons
1 year ago
4 mins read
Ethereum DeFi market crash Curve

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The Ethereum DeFi space is currently experiencing a rough few hours. All major DeFi coins are posting deep red numbers in the last 24 hours: Compound (-18%), Aave (-10%), Curve (-10%), Frax (-6%), and Synthetix (-6%).

The reason? Curve Finance, a flagship decentralized exchange specializing in stablecoin swaps, recently suffered a significant exploit. The resulting aftershocks are being felt across the DeFi ecosystem, inciting fears of a broader Ethereum DeFi massacre. The exploit, causing a damage of around $100 million, sets off potential domino effects threatening the stability of the wider DeFi landscape.

Curve Hack Sparks Fears Of Ethereum DeFi Crash

Delving into the details of the exploit reveals the intricate dynamics at play. The attackers took advantage of vulnerabilities in the Vyper smart contract software, leading to the significant losses on Curve Finance. The repercussions of this incident have been profound. The popular stablecoin DEX Curve Finance could be a ticking time bomb for the rest of the Ethereum DeFi sector.

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Post-incident, it is reported that over $45 million has been drained from liquidity pools of third-party providers, with an additional $25 million directly siphoned from the Curve Protocol’s CRV/ETH pool. The ensuing liquidity crisis and the impending risk of further sell-offs, given the millions of Curve (CRV) tokens still held by the attackers, is generating substantial anxiety within the market.

The founder of Curve Finance, Michael Egorov, has not been immune to these significant losses. His large positions backed by CRV have come under intense pressure, pushing the platform to the brink. Delphi Digital explains, “Curve founder, Michael Egorov, currently has a ~$100 million loan backed by 427.5 million CRV (about 47% of the entire CRV circulating supply). With CRV down 10% over the past 24 hours, the health of Curve is in jeopardy.”

Furthermore, Egorov holds large loans on Aave and Frax Finance, backed by CRV collateral. On Aave, he has a $305 million CRV backed loan amounting to 63.2 million USDT. At a liquidation threshold of 55%, his position could be liquidated if CRV/USDT hits $0.3767. As per Delphi Digital’s assessment, this would require a ~33% drop in the CRV price. Egorov also carries a ~4% APY for this loan.

The situation on Frax Finance is even more precarious. Here, Egorov has supplied 59 million CRV against 15.8 million FRAX of debt. The high utilization and the Time-Weighted Variable Interest Rate, doubling every 12 hours, makes his position particularly vulnerable to astronomical interest rates and subsequent liquidation, irrespective of the CRV price.

Delphi Digital emphasizes, “This astronomical interest rate could lead to his eventual liquidation, regardless of CRV price. At a max LTV of 75%, his position’s liquidation price could reach 0.517 CRV/FRAX within 4.5 days, less than a 10% decrease from current prices.”

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Today, Egorov deployed a new Curve pool and gauge: a 2 pool consisting of crvUSD & Fraxlend’s CRV/FRAX LP token, seeded with 100,000 of CRV rewards. However, with no success. Utilization was quickly back to 100% as illiquid CRV holders took Frax stables to exit, and Frax lenders bailed on risky pool. Thus, Egorov’s new pool is just spending more of his CRV and not bringing his interest rate down.

As the market grapples with the mounting liquidation risk of Egorov’s positions, the potential market-wide repercussions are alarming. Autism Capital warns, “If Michael gets liquidated by Fraxlend, all of his other debt positions will be liquidated too. This likely means Inverse Finance (INV) and Magic Internet Money (MIM) will both die due to the new bad debt, and Aave will get stuck with $63 million of bad debt.” Moreover, a liquidation of Egorov will likely trigger cascades on-chain and nuke CRV to almost zero.

Not All Hope Is Lost

However, despite the ensuing chaos, the DeFi sector’s operations, strictly governed by code and math, remain unaffected. As Autism Capital rightly puts it, “In one sense, this is proof that DeFi works as intended. There are no special rules or bailouts, no matter who you are. It’s a brutal free market governed by math and code.”

Moreover, there’s still hope for a happy-end. Assuming liquidity recovers, the DeFi sector might regain balance. The Curve team has indicated that several millions in US dollars are in possession of white-hat hackers. This could potentially enable the recovery of some of the misappropriated assets. Additionally, some bots intercepted a significant quantity of CRV tokens from the Curve attackers.

Nevertheless, the threat of the situation spreading remains a serious concern. Platforms like Frax, Aave and others remain on high alert, while some, like Alchemix, have already halted their smart contracts.

[UPDATE]

It looks like Egorov got an OTC deal with a CEX, paying off his debt. This is the reason for CRV’s price rebound.

About to drop to $13M loaned.

The money is definitely coming from an OTC deal.

It looks like a handshake deal. He’s selling his CRV at 0.4

🚨2.5M crv for 1M usdt clips

Which one of you chads got the sick deal? I assume this will go until entire debt paid off. pic.twitter.com/3c5OmcQ7wH

— Midas: Fool’s Gold (@MidasFoolsGold) August 1, 2023

[UPDATE #2]

According to Lookonchain, Curve founder Michael Egorov sold 5 million CRV to Justin Sun via OTC transactions at a price of $0.4. In addition to Sun, there are 7 addresses that conducted OTC transactions with Michael Egorov for $0.4. 0xSifu, the former CFO of Frog Nation, said that he was also contacted for OTC trading and had a 6-month lock-up period.

At press time, the Curve (CRV) price saw a slight recovery within the last three hours, rising to $0.57.

Ethereum DeFi Curve CRV price
CRV price sees slight recovery, 1-hour chart | Source CRVUSD on TradingView.com
Featured image from iStock, chart from TradingView.com
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Jake Simmons
Jake Simmons

Jake Simmons

Jake Simmons, a dedicated crypto journalist, has been passionate about Bitcoin since 2016 when he first learned about it. Through his extensive work with NewsBTC.com and Bitcoinist.com, Jake has become a trusted voice in the crypto community, guiding newcomers and seasoned enthusiasts alike towards a deeper understanding of this dynamic field.

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His mission is simple yet profound: to demystify Bitcoin and cryptocurrencies and make them accessible to everyone.
With a professional career in the Bitcoin and crypto scene that began right after graduating with a degree in Information Systems in 2017, Jake has immersed himself in the industry. Jake joined the NewsBTC Group in late 2022. His educational background provides him with the technical prowess and analytical skills necessary to dissect complex topics and present them in an understandable format. Whether you are a casual reader curious about Bitcoin or an investor seeking to navigate the latest market trends, Jake’s insights offer valuable perspectives that bridge the gap between complex technology and everyday usage.

Jake is not just a reporter on technological trends; he is a firm believer in the transformative potential of Bitcoin over traditional fiat currencies. To him, the current financial system is on the brink of chaos, propelled by unchecked government actions and flawed Keynesian economic policies. Drawing from the principles of the Austrian school of economics, Jake views Bitcoin not merely as a digital asset but as a crucial step towards rectifying a failing monetary system. His libertarian views reinforce his stance that just as the church was separated from the state, so too should money be freed from governmental control.

For Jake, Bitcoin represents more than just an investment; it's a peaceful revolution. He envisions a future where Bitcoin fosters a sustainable and responsible financial framework for generations to come. His advocacy is not about opposition but about evolution, about laying the groundwork for a system that prioritizes transparency and equity over secrecy and inequality.

As a journalist, Jake’s articles are crafted with the precision of a scholar and the passion of a true believer. He provides not only news but also thoughtful analysis that connects the dots between daily developments and larger economic theories. His work is a beacon for those lost in the technical jargon often associated with crypto discussions, illuminating the practical implications and benefits of these technologies.

In summary, Jake Simmons is not just reporting on a revolution; he wants to be part of it, fully committed to enhancing public understanding and adoption of Bitcoin and cryptocurrencies. His work is more than just a collection of articles; it’s a resource, a guide, and a companion for anyone ready to explore the potential of this digital frontier. Whether you are taking your first steps into crypto or are a veteran looking to stay on top of the latest trends, Jake’s insights provide clarity and foresight in an often unpredictable industry. Join him on this journey to reshape the world of finance, one post at a time.

You can engage with his latest takes on Twitter: @realJakeSimmons.

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