Curve’s controversy adds a comma, how does it impact itself and the industry’s development?

Curve's controversy and its impact on itself and the industry's development

Author: Jiang Haibo, LianGuaiNews

The vulnerability in the Vyper compiler of the smart contract programming language caused Curve to suffer a loss of over 50 million USD. Due to the negative impact of the news, founder Michael Egorov almost faced liquidation as he used CRV tokens as collateral to borrow stablecoins in multiple lending protocols. There was not as much liquidity in the market, including centralized exchanges. In the end, Michael temporarily resolved the situation by selling CRV tokens at a price of $0.4 (more than 20% below market price) to several well-known industry figures through OTC.

However, this incident has had a certain impact on Curve and even the entire DeFi ecosystem. In the following text, LianGuaiNews will briefly analyze some of the impacts of this incident.

Negative impact on Curve, but Curve still holds a leading position in this field

Although this incident was not Curve’s fault, it just happened that Curve used a specific version of the Vyper compiler that happened to have vulnerabilities. The attack faced by Curve was also one-time and can be avoided after the fix. However, inevitably, this incident caused some people to lose confidence in Curve.

According to data from DeFiLlama, in the past 7 days, Curve’s total value locked (TVL), which represents liquidity in Curve, has decreased by 27.77%, while Uniswap’s TVL only decreased by 3.1% during the same period. Compared to the $3.266 billion before the accident on July 30th, Curve’s TVL almost halved on August 1st and then increased slightly on August 4th.

Looking at historical data, several accidents in the industry have had a serious impact on Curve’s data, such as the MIM detachment, UST detachment, stETH detachment, FTX crash, and all of them were not Curve’s fault. The TVL did not recover after the accidents. Some of the reasons are that the market is in a downward cycle, but there are also reasons specific to Curve. For example, from the FTX crash to the present, the prices of mainstream coins like BTC have exceeded the prices at that time, but Curve’s TVL has not been able to recover.

Curve’s main product, StableSwap, is a highly competitive field. Centralized exchanges like Binance and decentralized exchanges like DODO do not charge transaction fees for major stablecoin trades. Currently, in the direction of on-chain stablecoin trading, Uniswap is almost on par with Curve. In addition, Uniswap dominates the broader field of non-stablecoin trading.

Curve also performs better in the broader StableSwap field, such as LSD (liquidity-staking derivatives) like wstETH and stablecoins like FRAX. Curve provides better liquidity for these projects. New stablecoin and LSD projects in the field generally prioritize using Curve for liquidity and liquidity incentives. Due to Curve’s token voting governance mechanism, projects like Frax have accumulated a lot of voting power in Curve and are deeply tied to Curve’s interests. For a period of time, Curve will still be the leader in the StableSwap field. Meanwhile, some projects that focus on the StableSwap field have almost gone to zero, such as Saddle Finance and Swerve, as well as some forked projects on non-Ethereum chains.

Attacker’s Repayment Initiative, Compensation Uncertain

One of the reasons why flagship projects are more attractive to capital is that even in the event of accidents, such projects are more likely to offer compensation.

Although it is not Curve’s fault, the loss did occur on Curve, affecting some users who trusted Curve. There have been discussions about compensation on Discord, but there is currently no clear official statement.

If compensation is made, it may be in the form of a portion of CRV tokens or transaction fees belonging to the DAO in Curve, which could have a short-term adverse impact on CRV holders. If no compensation is provided, it may also affect Curve’s liquidity, and some users who have provided liquidity in multiple pools may suffer losses. This group may redeem their liquidity due to the lack of compensation.

The ideal outcome would be for the hacker to fully repay or repay the majority, with a small portion compensated by Curve or related projects. This would not significantly reduce the equity of CRV holders, and users who have suffered losses can recover their funds and regain confidence. Currently, development is indeed following this path, and projects like Alchemix have recovered some funds after attempting to communicate with the hacker.

DeFi Yield No Longer Attractive, No 100% Safety

Early DeFi users were like “explorers of a new continent,” taking on greater risks, but also possibly gaining excess returns by discovering new opportunities. However, today, the risks and rewards seem to no longer be proportional.

Take the Curve 3pool (DAI/USDC/USDT) on Ethereum as an example. The pool has a liquidity of $230 million and a daily trading volume of $62.58 million, with a transaction fee ratio of 0.01%. Liquidity providers receive 50% of the transaction fees, while the DAO receives the remaining 50%. For liquidity providers, the APY generated solely from transaction fees is only 0.59%. Additionally, depending on the amount of CRV tokens staked, there is an APY of 0.91% to 2.29% in CRV token incentives. This means that if CRV tokens are not staked, the total APY for liquidity providers is only 1.5%. Even if you stake as many CRV tokens as possible or use yield aggregators like Convex, the maximum APY you can achieve is still less than 3%.

Curve is also a DeFi project that has been running smoothly for many years and was previously considered one of the safest DeFi projects. Although the attack it suffered was one-time and not due to Curve itself, this incident will make people realize that even the seemingly safest DeFi projects are not 100% secure. This incident may have an impact on new users entering DeFi, but it has a smaller impact on experienced users.

In contrast, with the interest rate hike in the United States, the yield of traditional financial markets is rising. As of August 4th, the yield on 3-month short-term bonds issued by the U.S. government is 5.443%, which is generally considered risk-free yield. The low yield of DeFi and the relatively higher risk may prompt some investors to convert their mining funds in DeFi into U.S. government bonds. However, as of August 4th, the issuance of the main stablecoin USDT has not seen a significant decline.

So, will this be good news for the RWA (Real World Assets) project? Maybe there will be a slight positive impact. However, this direction is not completely decentralized and there may be single points of failure and regulatory issues.

Tokens sold over-the-counter depend on moral lock-up for transparent selling pressure

Prior to this, Michael was criticized for holding too much CRV. Although the sale of CRV tokens through OTC will accelerate the decentralization of CRV, it may also lay the groundwork for future problems.

The OTC trading price for CRV in this case is $0.4, which is approximately 30% lower than the current market price. Some of the buyers are related projects such as Yearn Finance, which themselves need to accumulate a large amount of CRV for long-term staking. These buyers are less likely to sell CRV.

Another part of the buyers are investors in the industry. Although there is a six-month lock-up period, the tokens given to investors are fully unlocked, relying on “moral lock-up”. From the on-chain data, it can be seen that some investors have locked up the received CRV tokens in Curve for six months. Considering reputation issues, it is possible that no or only a few investors will sell CRV before the agreed date.

However, this part of the tokens may still have an impact on the price of CRV. Although spot trading will not be immediately sold, some investors may hedge through perpetual contracts on centralized exchanges. From the occurrence of the incident until August 4th, the funding rate of the Binance CRV/USDT perpetual contract trading pair has remained negative, indicating a bearish sentiment.

In addition, Michael is still selling CRV on-chain to exchange for stablecoins to repay debts, causing selling pressure. Since the main purpose of many liquidity providers in Curve is to earn profits, a lower CRV price may also result in a decrease in liquidity, causing negative impacts.