Encryption Analyst: Aave should freeze CRV tokens belonging to Curve’s founder
Analyst suggests Aave freeze CRV tokens owned by Curve founder
Author: DeFi Made Here, crypto analyst; Translator: Blockingxiaozou
On June 12, 2023, Gauntlett proposed in the Aave governance community to freeze the CRV tokens in Curve Finance founder Michael Egorov’s wallet loan position. Gauntlet stated that it had examined the risk status of the wallet, which relies heavily on CRV tokens as collateral. The account is related to Curve Finance founder Michael Egorov, and according to on-chain data, the account has borrowed about US$63 million in USDT by putting up 288 million CRV tokens (about US$180 million) as collateral. It should be noted that the 288 million CRV tokens account for more than 30% of its total circulation, and it is recommended to freeze them to prevent bad debts due to the decline in liquidity on exchanges.
I support Gauntlet’s proposal to freeze CRV on Aave v2.
The CRV market is dangerous for Aave and makes no sense. Of the 306 million CRV tokens in Aave, 289 million are stored by the Curve Finance founder, who borrowed US$63 million in stablecoins against them. Wondering why?
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Borrowing against your own tokens has many benefits, which convey the following messages:
• The CRV price will not drop.
• “The founder is not dumping.”
• Lower slippage compared to dumping on the open market.
• You can borrow more money if the price goes up.
Last November, Avi (note: the crypto trader is Avraham Eisenberg, who is known as Avi on crypto Twitter) planned to manipulate the market to liquidate Michael Egorov (Curve founder), but the result was not as expected. Since then, borrowing against CRV has stopped.
Therefore, Michael Egorov is almost the only lender of CRV on Aave, and he is getting stablecoins from the shared lending pool.
Michael Egorov also pledged CRV to borrow stablecoins on the Frax Finance lending market, MIM Spell, and Inverse Finance (about US$44 million in stablecoins have been borrowed).
However, Aave cannot force repayment by simply setting the LTV to 0. The reason is as follows:
The problem is that no one can close his 412 million CRV position (about US$268 million). Selling only 10 million CRV on-chain will result in a slippage of more than 21%.
And it’s hard to believe that, when faced with a real liquidation threat, Michael Egorov himself would repay the loan. Who would voluntarily give up USD for worthless tokens?
So if the LTV suddenly changes, it will only result in bad debts. There will be no liquidators, and the happy owner of the new Australian mansion (Note: Curve founder Michael Egorov has just spent a lot of money buying an Australian mansion) will not sell the mansion for CRV.
What is the best way for Aave and other lending markets? That is:
• Ban further CRV-mortgaged loans.
• Gradually start lowering the LTV of the CRV market (e.g. reduce it by 1% per week).
In this case, Michael Egorov may repay some of his debt to a lower liquidation level, which would bring risks to these lending markets. At least he won’t be able to add to his leverage of about $110 million in CRV, while the on-chain liquidity of CRV is only $24 million. I know this will draw some dissatisfaction and criticism, but you have to understand that this leverage is enough to destroy Curve.
Why do I say that if the price of CRV falls, it could destroy Curve? Because it’s a farming token whose TVL is closely related to the price of CRV.
