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.
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.
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.
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?