DeFi on the brink of collapse? This weekend, a flaw in the Vyper language led to numerous hacks. Among them, at least 42 million dollars stolen from the Curve protocol. A situation that led to the token CRV down. The entire ecosystem is now holding its breath in the face of a potential black swan event.
Hack Curve and systemic risks on Aave
It’s impossible to have missed this information: Curve has been the target of a major hack. In practice, tens of millions of dollars were stolen from the protocol. Subsequently, other protocols were also targeted by hackers eager to exploit the same flaw as Curve.
Of course, as a result of this hack, the CRV suffered a significant drop. On the one hand, on centralized platforms, the fall was contained and reached a low of 0.5 dollar.
In DeFi, the situation is quite different. The CRV token plunged to less than 10 cents on Uniswap.
You may not know it, but we’re so close to catastrophe. Indeed, we have been fortunate in that much of DeFi is based on the Oracles of ChainLink for prices.
Indeed, ChainLink aggregates both CEX and DEX prices. Consequently, ChainLink has never published the Uniswap price as the CRV price.
In practice, it was Michael Egorov, Curve’s CEO himself, who could have triggered a DeFi tumble.
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Michael Egorov’s situation
Thus, Michael Egorov has a strong position in Aave v2. In practice, he has filed no less than 304 million CRV tokensnearly $170 million on Aave. These funds were then used to borrow $70 million in stablecoin.
With a loan comes the risk of liquidation. That’s right, if the price of CRV were to fall, Egorov’s CRVs would be resold to bail out his loan. Fortunately, this has not yet happened.
As reported by DeFiLlamaEgorov’s loan would face liquidation if the CRV price fell below 0.369 dollar. We are therefore extremely fortunate that the much more massive fall recorded on Uniswap did not result in a liquidation.
Indeed, if the CRV price were to fall, some of the CRVs deposited by Egorov would be resold by liquidation bots on the public markets. These resales would push the price down once again, leading to further liquidations. A chain liquidation phenomenon would then be underway, which could spread to other assets and protocols.
Moreover, this does not stop with its position in Aave. Egorov has other loans collateralized by CRVs on the Abracadabra, FraxLend, Inverse Finance, Stake DAO and Convex protocols. These are all platforms at risk from a potential initial liquidation on Aave.
A liquidity problem
While the problem could end there, the story gets more complicated. As we’ve just seen, if the price of CRV falls below $0.37, Egorov’s loan will be liquidated.
But is this even possible? Indeed, as OlimpioCrypto in a thread Twitter, the market has no such liquidity.
In DeFi, the majority of CRV pools have virtually no ETH in front of them. These are filled with CRVs.
On the centralized exchanges, the situation is similar. On Binance we find 8 million limit orders on CRV at $0.3. The same goes for OKX, which has 1.3 million CRVs.
In this case, if the protocol can’t liquidate the position, it’s in default. It will then be up to Aave and the holders of its AAVE token to cover the bad debt created.
Yet the situation had already been pointed out even before all this happened. Indeed, last June, many members of the community tried to intervene on this huge position held by Egorov.
Unfortunately, the Aave DAO voted against the proposal to freeze CRVs on Aave v2 and reduce the loan-to-value ratio for the CRV. A refusal that could well cost the protocol dearly in the future.
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