Analysis of Curve Founder’s “Collateralized Cash-Out” Behavior: From Shorting Costs to Market Impact

Curve Founder's "Collateralized Cash-Out" Behavior Analysis: From Shorting Costs to Market Impact

Author: Yilan, Invest&Research@LD Capital

Recently, the behavior of Curve founder cashing out and continuously mortgaging CRV to borrow stablecoins has become the focus of the market’s attention when the market liquidity is affected by the SEC incident. In order to analyze the on-chain short selling cost of CRV, its possibility, and related effects, let’s first review how short selling was conducted in last year’s CRV bull and bear war.

Shortly after FTX went bankrupt last year, when the market lacked confidence and liquidity was extremely sluggish, a whale borrowed a large number of CRV tokens from Aave and transferred them to the OKX trading platform. In total, 47 million CRVs were borrowed. Influenced by the whale’s dumping and short selling, the CRV price fell from $0.545 to $0.424, a decrease of 21.88%. The lowest point was $0.4. This operation is to short the market on a large scale by repeatedly borrowing and transferring tokens on the chain.

Then founder Michael bought CRV to boost the price. Although Aave accounts bear the risk of liquidation, shorts still have profit potential. One way to profit is to conduct high-leverage short selling transactions on exchanges such as OKX, using the lack of market liquidity and the lack of strong long interference to obtain high-probability profit opportunities. Another way to profit is to convert short positions to long positions. When the market liquidity is exhausted, shorts close out and switch to long positions.

Aave cancelled CRV borrowing (i.e. it is impossible to increase leverage for short selling through the same on-chain cyclic loan).

In addition, centralized trading platforms also provide opportunities for borrowing and short selling.

Currently, the chip distribution of CRV tokens is as follows: 116 million held in Curve dex, 65.47 million held by Binance, 12.56 million held by OKX, and a total of 53.29 million held by other centralized trading platforms.

It can be seen that centralized trading platforms hold a large amount of CRV tokens, accounting for 15% of the total circulation. However, since centralized trading platform data is lacking, it is impossible to calculate the possible cost of short selling behavior.

Currently, the total on-chain liquidation amount of CRV is 113 million U.S. dollars, of which 99% (28.9 million CRV) is concentrated around the price of $0.375. This means that borrowing and short selling may be enough to press the price to the liquidation price, but Curve’s founder has the ability to add margin to continue pushing the liquidation price down, making the cost of pure short selling very high.

Aave launches CRV and CRV liquidation levels

However, in fact, no one can liquidate this volume of CRV, so if Aave wants Michael to reblock his loan, lowering the CRV lending pool’s LTV is the correct risk control measure, but the LTV should not be suddenly changed to 0, which will greatly increase Aave’s bad debt risk.

Although there are few ways to borrow CRV on the chain, there is a large amount of spot selling pressure on the chain CRV, and in the past 6 hours, the short selling behavior of centralized trading platforms has increased significantly (190%+ APY on BN to short CRV), OI has increased by 5 million in two hours and 14 million in 24 hours.

The founder of CRV has borrowed more than $44 million stablecoins from AAVE, Abracadabra, Fraxlend, Curve, and Inverse Finance. If liquidation (see the previous thread for specific information on liquidation prices, etc.) occurs, these lending platforms have potential bad debt risks.

However, in fact, Aave’s volume of CRV will be liquidated in the event of a large slippage, so lowering the CRV lending pool’s LTV is the correct risk control measure, but it should be slowly lowered instead of suddenly changing the LTV to 0, which will greatly increase Aave’s bad debt risk.

In the past day, founder Michael has withdrawn more than 7 million wCRV (25%+) from Fraxlend and deposited it into Inverse Finance (fixed borrow rate 6.84%) 0x73f8af. This address is created by Inverse Finance FiRM CRV market, and the Curve founder has pledged at least 6 million wCRV in this address. Currently, there is more than 9 million w TVL in the Inverse Finance CRV pool, most of which are pledged by the CRV founder.

In addition, 4 million CRV is still pledged in Abracadabra, and nearly 80 million CRV is in the Abracadabra CDP.