Curve Finance hack exposing the core problems of DeFi

DeFi has democratized finance, breaking the barriers that once kept it exclusive and opaque. However, DeFi comes with its fair share of problems, and the recent hack of Curve Finance – or more precisely, the mayhem it has triggered – has shown us some of the ugliest.

What happened to Curve Finance ❓

Curve is one of the oldest and most esteemed DEX (decentralized exchanges) in the space.
Last week, a bug allowed a hacker to exploit several Curve liquidity pools, resulting in the theft of approximately $62 million worth of crypto. Although this hack is fairly small by the crypto standards, (only about 4% of Curve’s TVL), its impact reverberated across the whole DeFi space.

Token concentration and liquidation risk 💥

Understandably, the hack led to a price drop of $CRV 📉, Curve’s native token used for governance and incentivizing liquidity providers. It has fallen from $0.73 to $0.50.
So far, nothing really alarming, but it happens that $CRV is extremely highly concentrated 💰 in the hands of Curve founder, Michael Egorov.

It also happens that Mr. Egorov was really determined to make his tokens work and locked a huge amount in DeFi lending protocols as collateral.
In fact, as much as 48% 🤦‍♀️ of the current $CRV supply was locked in Aave, Frax, Abracadabra, and Inverse. In exchange, Mr. Egorov could borrow an equivalent of $100 million.

The hack-induced price drop decreased the $CRV collateral’s value, dangerously approaching the liquidation thresholds.
Now, if $CRV falls below $0.37, the 305 million $CRV backing the $60 million loan on Aave will be liquidated. And since liquidation means selling big quantities of the token in a matter of seconds, it is almost certain it will crash the price dramatically and spread the contagion across many users and protocols.

Stabilization attempts 💸

In a bid to avoid liquidations, Mr. Egorov started to repay some of his debts. For this, he resorted to selling the remainder of his $CRV holdings. Nansen researchers noticed at least 54.5 million $CRV changing hands in OTC (over-the-counter) deals with some famous in the crypto space people (Justin Sun among them).

These sales are a good thing for the DeFi space not only because they can help avoid a massive $CRV crash, but also because they speed up the token’s redistribution, creating a healthier and more sustainable market.

💁‍♀️  However, this problem would have not existed in the first place, if only the Curve community insisted on a better distribution, or at least a much longer lockup period for the founder’s tokens.

Will we learn the lesson this time?