(Bloomberg) — Crypto lending platforms are seeking to minimize the fallout from the recent hack of the decentralized finance exchange Curve Finance.
(Bloomberg) — Crypto lending platforms are seeking to minimize the fallout from the recent hack of the decentralized finance exchange Curve Finance.
The weekend breach led to a decline in the value and liquidity of the CRV token, the governance cryptocurrency of the exchange. The price decline also jeopardized tens of million of dollars in loans that Curve Finance founder Michael Egorov had taken out with CRV serving as collateral with lenders including Aave, Fraxland and Abracadabra.
On Aave, the crypto risk modeling firm Gauntlet has proposed that the decentralized autonomous organization that governs the project freeze the CRV lending market on the platform. A vote is already being conducted by the DAO that manages Abracadabra on whether to raise interest rates on the loans to Egorov, essentially to force a liquidation. The vote will end on Thursday. A majority of the votes cast so far on the DAO oppose the proposal.
“There’s bit of interesting gamesmanship or game theory right now since Aave, Frax, [Abracadabra] all have exposure and whoever liquidates first obviously loses less,” said Shiliang Tang, chief investment officer at crypto fund LedgerPrime. “But if no one pushes, then they all win cause he can repay over time.”
DeFi lending platforms allow users such as Egorov to borrow assets without intermediaries thanks to the blockchain technology, and they are usually relying on over-collateralization basis. Egorov did not immediately respond to a request for comment.
DeFi was praised by industry advocates when centralized lenders like Genesis Global Holdco LLC went bankrupt amid their exposure to hedge fund Three Arrows and others.
Borrowers on DeFi lending platforms pay interest rates that are usually automatically adjusted based on supply and demand. When the value of a borrower’s collateral, in this case, CRV, drops below a certain number, an automated liquidation will be triggered to sell the collateral assets to cover the debt. On Aave, for example, the liquidation price for Egorov’s loans is at $0.368, according to Gauntlet’s estimate. CRV’s price is down by 4.8% to $0.58, according to tracker CoinGecko.
The transparency makes Egorov’s positions especially vulnerable to attacks from other traders, according to Leo Mizuhara, founder and chief executive of DeFi institutional asset management platform Hashnote. As Bloomberg reported, this is not the first time when Egorov’s loans caused anxiety.
Blockchain data from tracker DeBank shows that Egorov is slowly repaying his positions — which stood at over $100 million just a day ago — after he secured extra funding by selling his CRV holdings via over-the-counter trades.
But the transactions have raised questions on the future of Curve Finance, since the buyers include investors such as crypto entrepreneur Justin Sun, who was accused by US Securities & Exchange Commission of allegedly breaking securities rules. Sun has denied the allegations.
“The good and the bad of decentralized system is that no one party realistically can dominate these decisions and there’s always a tension between risks reduction and revenue maximization or growth,” said Tarun Chitra, chief executive officer and founder of Gauntlet.
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