After the Curve crisis, did lending platforms fall into a prisoner's dilemma?
Everything is to make the Curve founder pay back first.Author: Fu Ruhe, Odaily Planet Daily
After experiencing the Curve incident in the past two days, the DeFi sector is facing a significant crisis of confidence. Among them, the lending platforms related to Curve founder Michael Egorov's personal debt have been particularly anxious these days.
Egorov has taken a series of actions to reduce the risk of liquidation, such as launching the crvUSD/fFRAX pool on Curve, which in turn affects the debt warehouse interest rates of the CRV/FRAX pool on Fraxlend, and selling a large amount of CRV locked for 6 months through OTC to repay debts. According to on-chain analyst Yu Jin's monitoring, as of August 2 at 10 PM, Egorov had sold a total of 59.5 million CRV, obtaining $23.8 million in funds.
The Curve incident seems to have turned around (at least DeFi is still alive). However, the four core lending platforms—Aave, Fraxlend, Abracadabra, and Inverse—caught in the turmoil are busy preparing for the worst, proposing significant changes to the Curve pool in hopes of reducing the risk of future bad debts and cascading liquidations.
Odaily Planet Daily has looked into the latest actions of these four platforms and shares their improvement directions and progress as follows.
Aave
As the party with the largest debt warehouse, Aave's subsequent measures are the most worthy of attention. How can it avoid the impact of large positions on the platform's normal operation?
In fact, there was already a liquidation risk from late May to mid-June this year, when Egorov first purchased a mansion, then was sued by three VCs, and later borrowed a total of $71 million in stablecoins from Aave (according to Lookonchain), triggering panic in the market.
In mid-June, ChaosLabs initiated a proposal on Aave to reduce the CRV LT by 3% to slowly curb its overheating behavior. The proposal was approved, but the effect was not significant. (On June 15, CRV dropped to a monthly low of 0.558 USDT.)
Gauntlet later suggested freezing CRV on Aave's governance forum and setting the CRV LTV to 0 on Aave v2. The specifics are as follows:
Unfortunately, this round of proposals did not pass due to insufficient votes and a large number of opposing votes. Some voices on Aave's governance forum believed that this move was not decentralized enough, and one should not impose restrictions on Egorov just because of the large scale of his borrowing.
Recently, the Aave governance forum has reopened discussions on the Curve incident, hoping to minimize risks on the Aave platform through previous proposals. This measure can somewhat limit the use of the CRV pool on Aave.
However, Emilio in the governance forum believes that even setting the LTV to 0 can still be circumvented using flash loans.
In response, Mindao, founder of dForce, explained to Odaily Planet Daily: "LTV checks require account equity checks. Flash loans involve borrowing and repaying in one transaction, which does not affect changes in account equity, allowing continued borrowing through flash loans (this may be overlooked in the V2 mechanism). But this only allows flash loans to bypass; it can actually restrict new non-flash loan borrowing. This person seems to be looking for a convenient excuse to oppose any adjustments."
Fraxlend
As the party facing the greatest risk from Egorov during the liquidation turmoil, Fraxlend has adopted risk isolation and special interest rate adjustment mechanisms, forcing Egorov to repay debts on this platform first. Fraxlend's better mechanism has placed it in a position of priority repayment during this liquidation storm.
For details and advantages of Fraxlend's interest rate adjustment mechanism, see Odaily Planet Daily's article “Rising to 10,000% in just three and a half days? How exactly are Fraxlend's interest rates calculated?”, which will not be elaborated here.
Abracadabra
In this incident, Abracadabra also acted quickly, passing the emergency proposal AIP #13.4 to freeze the CRV market liquidation. Although there were only 5 voters, the lack of decentralization in governance at this time actually reflected an advantage in decision-making efficiency.
Abracadabra later launched AIP #13.5: Interest Rate Adjustment for CRV LPs, which redefined the way interest is earned, determining the amount of interest deducted based on the product of the corresponding interest rate and collateral rate. The specific interest rates are shown in the following image:
Currently, DeBank data shows that Egorov still needs to repay about $12 million in MIM.
Under Abracadabra's new proposal, the nearly 46 hours reserved for Egorov is running out, and the situation is not optimistic. Although this move is domineering, it is effective and aims to quickly reduce its own bad debt risk. Egorov will likely continue to exchange for MIM to repay debts through OTC.
Inverse
On the evening of August 2, community member edo released a proposal regarding the Curve incident. Compared to the previous three, Inverse's proposal is relatively mild due to its lower debt warehouse—reducing the collateral rates for CRV, cvxCRV, st-yCRV, and cvxFXS while increasing liquidation incentives for cvxCRV, st-yCRV, and cvxFXS. The specifics are shown in the table below:
Inverse's actions do not seem to show any strong performance, and the community has not yet voted on this proposal.
In summary,
Aave is the most decentralized but has lower efficiency; the latest proposal mentioned earlier will enter the on-chain governance process today.
Fraxlend has inherent advantages and strong risk resistance.
Abracadabra reacts quickly, with strong new proposals, but its governance is not very decentralized.
Inverse's current proposals from community members seem to lack strength and have not yet been voted on.
