CRV liquidation crisis raises alarms! Proposals from protocols like Aave force Curve founder to repay debts promptly, reducing bad debt risks.

Curve founder Michael Egorov has been using CRV for on-chain lending for a long time. Recently, due to the security incident at Curve, a CRV liquidation panic has resurfaced. Egorov has borrowed heavily from lending protocols Aave, Fraxlend, and Abracadabra. Twitter influencer @Loki_Zeng has also noticed that the governance communities of these protocols are working to mitigate the risks associated with liquidation, potentially forcing Curve's founder to repay the loans as soon as possible.

Understanding the liquidation crisis of Curve's founder

Aave Governance Proposal: Stop CRV Borrowing, Not in Favor of Freezing CRV

DeFi risk solution platform Chaos Labs proposal:

• It is recommended to disable CRV borrowing on Aave V3 on Ethereum and Polygon to minimize the possibility of shorting CRV or borrowing CRV for selling and further impacting the price.
• Although there have been proposals in the past to freeze the CRV market and set the Loan-to-Value ratio LTV to zero due to the threat of CRV to Aave, Chaos Labs believes that this may not be very effective as the Lightning Loan can bypass the LTV limit and lead to early liquidation of CRV borrowing positions.

Abracadabra High-Interest Proposal, Pressuring Repayment

Abracadabra, which allows Egorov to borrow a large amount of MIM tokens using CRV, is currently voting on a governance proposal to increase the interest rates on existing borrowing positions. Expected to be completed by 8/3. Update on 8/3: Proposal did not pass, a friendly version has been proposed.

Changes to the borrowing interest rate calculation:

Interest rates will also be compounded based on the collateral ratio:

On-chain data shows that Egorov has two borrowing positions:

• 43,154,437 CRV worth approximately $24 million, borrowed 12,020,288 MIM worth approximately $12 million
• 8,500,000 CRV worth approximately $4.08 million, borrowed 2,045,112 MIM worth approximately $2 million

If the proposal is successful, Egorov's principal will face a 200% base interest rate and may face pressure from the multiplier interest rates. Update on 8/3: Proposal did not pass

Fraxlend's Risk Mechanism is Already Tough: Current Interest Rate is Nearly 57%

As of the deadline, the CRV collateral borrowing interest rate on Fraxlend is 57%, which has significantly decreased as Egorov continues to reduce positions.

KOL @Loki_Zeng comments: Fraxlend's original mechanism is already sound, with risk isolation and dynamic interest rates, requiring no additional measures, Egorov needs to proactively repay.

@Loki_Zeng Comments: Different Crisis Handling Approaches by Lending Platforms

Twitter KOL @Loki_Zeng's new Fire Technology Loki comments on the crisis handling methods of four platforms where Egorov borrowed a large amount using CRV:

Fraxlend's original mechanism is already sound, with risk isolation and dynamic interest rates, requiring no additional measures, which will compel users to proactively repay. Even borrowing more money from Aave, selling coins OTC, must be repaid. Fraxlend's mechanism is the most effective and fair, as well as predetermined.

Loki states that Aave, as Egorov's largest creditor, has certain historical legacy issues, with mechanisms gradually improving rather than being perfected all at once. Otherwise, such unreasonable borrowing positions should have been restricted from the beginning. However, in terms of how the situation is resolved, governance discussions are more comprehensive and timely. The current consensus is to reduce Curve's LTV to 0 and freeze new borrowings. However, other proposals, such as lowering liquidation thresholds, increasing interest rates, still have significant controversy. Overall, Aave's governance is decentralized but not efficient enough and cannot resolve issues quickly.

Loki considers Abracadabra to be straightforward, freezing liquidation, raising interest rates, not repaying debts, and directly deducting from borrowing positions. Additionally, freezing liquidation was implemented with only five votes. Very authoritarian but effective, as failure to repay results in continuous deductions.

Among these three cases, Loki believes that Fraxlend's mechanism is the most advanced. Another lending protocol used by Egorov, Inverse, has almost no discussion on handling methods.

@Defilgnas also compiled the lending protocols and scale used by Egorov, with the CRV price at 0.57 as of the deadline:

An astonishing 48% of the circulating CRV supply is deposited as collateral by the Curve founder alone. pic.twitter.com/qxvoeS6sZ1

— Ignas | DeFi Research (@DefiIgnas) August 1, 2023