The founder was ultimately liquidated, is Curve's flywheel completely bankrupt?

Author: Luccy, BlockBeats

In the recent downturn of the cryptocurrency market, the hardest hit has been CRV.

This morning, Arkham reported that Curve founder Michael Egorov is currently using $140 million worth of CRV as collateral across five accounts on five protocols to borrow $95.7 million in stablecoins (mainly crvUSD). Among them, Michael has a $50 million crvUSD loan on Llamalend, and Egorov's three accounts have accounted for over 90% of the crvUSD borrowed on that protocol.

Arkham pointed out that if the price of CRV drops by about 10%, these positions may begin to be liquidated. Subsequently, the decline of CRV continued to expand, briefly falling below $0.26, reaching a historical low, and the CRV lending positions across multiple addresses of Michael gradually fell below the liquidation threshold.

In the past, Michael would add collateral to save his positions, but this time, he seems to have "given up."

According to Yu Jin monitoring, Michael Egorov's main address has already seen some CRV positions begin to be liquidated on Inverse. Additionally, Lookonchain monitoring shows that Michael Egorov currently holds 111.87 million CRV ($33.87 million) in collateral and has $20.6 million in debt across four platforms.

### Liquidation Crisis Two Months Ago

The crisis for CRV began to show signs two months ago when Michael's lending positions fell below the liquidation threshold, but at that time, he was not liquidated, nor did he take any remedial actions.

On April 14, as the market declined, the price of CRV was also affected, dropping to $0.42, and Curve founder Michael Egorov's lending positions entered the red line again. According to Yu Jin monitoring, Michael had pledged a total of 371 million CRV across six lending platforms through five addresses and borrowed $92.54 million in stablecoins. Among the twelve debts, the silo lending position was the most dangerous.

Since November 2022, when the "on-chain short seller" ponzishorter attempted to short its token CRV, until the end of July 2023, when Curve was attacked due to a Vyper compiler bug, Michael frequently took action to save his positions, stirring the "soup" of DeFi, and people likened this series of actions to a "DeFi defense war."

The first "defense war" may have been Michael's baiting of shorts, causing the price of CRV to rise instead of fall, profiting from the "air force battle." The second "defense war" leveraged the power of over-the-counter (OTC) trading, which, although reduced his holdings, garnered support from a group of powerful backers, including Wu Jihan, Du Jun, Sun Yuchen, and institutions like DWF. It can be said that both of CRV's defense wars had the aura of victors.

On the afternoon of April 14, as the price of CRV fell to $0.42, according to debank data, five of Michael's twelve positions had health factors reaching 1.12 or even lower. Yu Jin monitored Michael's debt positions reaching the red line and tweeted a liquidation speculation, pointing out that if the price of CRV continued to drop by 10% without adding collateral or repaying, liquidation procedures would be initiated.

No Liquidation of All Debt Positions

However, just as people were pondering how CRV would respond to the third "DeFi defense war," something interesting happened.

People noticed that at 4 AM that day, the price of CRV briefly dropped to $0.3592, already below the 10% threshold of $0.42. Yet, Michael's debt positions were not liquidated as Yu Jin had suggested, and even Michael himself seemed not to have taken any remedial measures.

Michael's debt positions are distributed across six different lending protocols, with the most controversial lending protocol being silo.

After Curve was attacked, most lending protocols were unwilling to bear too much risk associated with CRV and tightened their policies. Among the loans Michael raised, over half came from silo. In the subsequent process of Michael repaying his AAVE debt, silo provided almost all the necessary loans. It can be said that silo became Michael's biggest ally on the road to repaying debts, and many community members jokingly referred to it as Michael's "personal bank."

At that time, in Michael's total debt positions, approximately 113 million CRV were deposited in the silo protocol, borrowing stablecoins worth about $27.9 million, accounting for 30% of Michael's total debt. However, Curve LlamaLend, UwU Lend, and FraxLend protocols also provided a significant portion of loans to Michael, although their proportions were not as high as silo, they were still above 15%, with Curve LlamaLend accounting for 20.7%, UwU Lend for 17.9%, and FraxLend for 17.3%.

On the other hand, silo had forked a new protocol called Silo Llama, which is an isolated lending protocol specifically designed for crvUSD. Although this protocol is filled with skepticism, DeFi should be designed to be independent of user sentiment. Compared to borrowing, the locking rate of CRV has a greater impact on the selling of CRV. Creating a separate pool for CRV is one of the ways to work within the DeFi lending treasury, and members of the silo team have also explicitly denied accusations of "creating Silo Llama for one person."

Setting aside the relationship between silo and curve, the essence of the debate is that silo did not liquidate CRV. Insiders indicated that due to the CRV positions on silo using Chainlink oracles, price updates may lag behind those on debank, so whether the oracle tracked the liquidation price is questionable.

According to Chainlink data, the recorded CRV prices showed that at 5:30 AM on April 14, it fell below $0.4, hovering in the range of $0.36 to $0.38. Subsequently, I checked multiple data sources including dexscreener, coingecko, tradingview, and coinmarket, and at that time, CRV had indeed dropped to around $0.36 on the 30-minute chart.

Since the lowest price of CRV occurred in the early morning, I cannot verify whether the health factor was zero at that time. But regardless of what happened that night between CRV and various lending protocols, the only thing that can be confirmed is that not only silo, but all of Michael's debt positions remain intact.

This crisis has drawn attention to the manual liquidation mechanism of silo. Since the liquidation on silo is completely open, liquidators can choose to liquidate manually or automatically. When asked whether choosing manual liquidation means that it will not be liquidated by machines, insiders stated that manual liquidation is merely a personal liquidation entry provided by the platform. When facing a debt awaiting liquidation, individuals still need to compete with machines for orders, and often cannot outbid the machines.

Therefore, whether liquidation is triggered or not is most crucially dependent on whether the collateral price has truly dropped to the liquidation value.

The "Price Game" of Liquidation Mechanisms

According to silo documentation, this lending protocol has a liquidation application that the core team uses to monitor risk positions and liquidate under-collateralized positions if the liquidation bots (including Silo) do not liquidate first for any reason.

On April 19, CRV fell again to $0.4. According to the addresses provided by Yu Jin, the addresses starting with 0x9, 0x4, and 0x7 all had health factors below 0.1 in silo's debt positions, indicating a dangerous state.

According to the collateral factor table from silo finance, the loan-to-value (LTV) ratio for CRV in the silo protocol is 65%, and the liquidation threshold (LT) is 85%. This means that Michael's silo liquidation price is in the range of $0.41 to $0.44, so the health factor is theoretically already at 0.

Calculation formulas:

*Liquidation Price = Total Borrowed Amount / (Collateral Amount * LTV * LT)*

*Health Factor = 1 - Total Borrowed Amount / (Total Collateral Amount * LTV)*

In this regard, BlockBeats verified with the project team that their price tracking is not simply looking at oracle prices but uses a weighted average algorithm. This means that the liquidation price of a particular token can be influenced by the prices of the lender's other borrowing assets, so relying solely on the decline in CRV's price is not enough to trigger liquidation. However, when asked about liquidity supply issues, the project team did not respond.

As for Llamalend, where Michael's largest positions are located, its "automatic liquidation" mechanism can defend against soft liquidations. Simply put, its liquidation process is that when the price drops, the collateral is automatically converted into stablecoins, and when the price rises, the collateral token is sold back, requiring only a small repayment of crvUSD to increase the health factor.

Additionally, insiders told BlockBeats that in fact, in situations of significant market volatility, liquidators need to consider slippage issues, which involve the slippage of both crvUSD and CRV. In previous instances of large fluctuations, it is quite normal for lending protocol machines to remain inactive during liquidation.

### Did Michael "Cut" This Time?

The liquidation of tens of millions of dollars in debt positions has a significant impact on liquidity in the entire cryptocurrency market. The crisis in April was able to be avoided due to the defense mechanisms of lending platforms, but this time, with CRV dropping below $0.26, the crisis has finally arrived.

Liquidators Profit

Whether the new low price should be seen as a buying opportunity is also a topic of interest for investors, but at least in the case of CRV, liquidators have already begun to profit.

According to ai_9684xtpa monitoring, the address 0xF07…0f19E is one of the main liquidators of Michael's positions. In the past hour, this address liquidated 29.62 million CRV at an average price of $0.2549, spending a total of 7.55 million FRAX, and this portion of tokens has all been deposited into Binance, with an average deposit price of $0.2792.

As a liquidator, a more economical approach might be: to first open a short position (or borrow tokens to sell) on Binance before liquidation, so that the tokens obtained from liquidation are only used for covering the short (or repayment), without bearing the profit and loss caused by price fluctuations during that period.

However, even if 0xF07…0f19E does not do this, simply selling at the average deposit price can still yield a profit of $720,000.

Investors Suffer Losses

On the other hand, investors are facing disaster.

On one hand, the price drop triggered liquidations on other lending platforms, with lenders on Fraxlend suffering millions of dollars in liquidations. According to Lookonchain monitoring, a user was liquidated for 10.58 million CRV ($3.3 million) on Fraxlend.

In comparison, Fraxlend's liquidation mechanism is easier to trigger, and its risk isolation and dynamic interest rate mechanisms do not require any additional measures to prompt Michael to repay voluntarily. In previous liquidation crises, Michael borrowed a large amount of assets from Aave and sold tokens through OTC to repay his debts to Fraxlend.

On the other hand, early CRV investors are facing huge losses.

Since last year's CRV crisis, there has been no shortage of comments in the community about "Curve having a good hand but being played poorly by Michael." This CRV crisis is particularly noteworthy for the major investors who previously helped Michael.

After Curve was hacked at the end of July last year, various OGs, institutions, and VCs provided strong support. Wu Jihan, co-founder of Bitmain and Matrixport, stated on social media: "In the upcoming RWA wave, CRV is one of the most important infrastructures. I have bought the dip; this does not constitute financial advice."

Huang Licheng confirmed on social media that he acquired 3.75 million CRV from Curve's founder through OTC and locked them in the Curve protocol. The next day, Sun Yuchen's related address also transferred 2 million USDT to Egorov's address and received 5 million CRV.

Following that, projects like Yearn Finance, Stake DAO, and many institutions and VCs like DWF joined in the firefighting efforts for CRV.

Now that CRV has dropped to a historical low, Michael himself has yet to make any statements to save the situation. As the community has said, "the side that cuts has finally been cut by Michael."