Viewpoint: CRV market is dangerous for Aave and makes no sense at all.
Opinion: CRV market is risky and illogical for Aave.
Cryptocurrency researcher DeFi Made Here has shared his opinion on the Gauntlet proposal, stating his support for it and believing that the CRV market is risky for Aave.
Last November, Avi was about to manipulate the market to liquidate Mich, but it didn’t end well. Since then, borrowing CRV has been banned. Therefore, Mich is almost the only borrower of CRV on Aave, and he is borrowing stablecoins from the shared pool. Mich also borrows stablecoins using CRV as collateral from Frax Finance lending market, MIM, and Inverse Finance (borrowing about $44 million).
However, Aave cannot simply set LTV to 0 to force repayment. The reason is that no one can liquidate his 412 million CRV position (about $268 million). Selling only 10 million CRV on-chain will result in over 21% slippage. And it’s hard to believe that Mich himself would repay the loan under the threat of liquidation. Who would voluntarily give up dollars for worthless tokens? Therefore, if Aave suddenly changes LTV, it will only result in bad debt.
- Analysis of Curve Founder’s “Collateralized Cash-Out...
- Messari: Q1 2023 L1 Public Chain Operation Report
- Nostr2.0: A Layer 2 off-chain data storage layer for Bitcoin
What is the best way for Aave (and other lending markets)? Do not allow further borrowing against CRV; gradually begin to lower the LTV of the CRV market (possibly by 1% per week). In this case, Mich may repay part of the debt at a lower liquidation level, thereby bringing risks to these lending markets. At least he will not be able to increase his leverage on CRV by approximately $110 million, because its on-chain liquidity is only $24 million. A drop in CRV prices could kill Curve, as CRV is a mining token, and Curve TVL is closely related to CRV prices.
Founder of AAVE Chan’s view on CRV: Thank you for your insights and discussion on this matter. I would like to share some thoughts from the perspective of Aave-Chan Initiative (ACI). First, it is important to remember the core spirit of DeFi, which is neutrality. Whether a pool is composed of a large position or a thousand smaller positions with similar liquidation ranges, the protocol should operate effectively. Users’ intentions or how they use their funds are not our primary concern. Users should be free to use the protocol in the way they see fit. Second, we need to be cautious about implementing “solutions” that may do more harm than good. The user who asked the question currently has a healthy health factor. Artificially increasing the likelihood of liquidation by increasing the reserve factor (RF) or lowering the liquidation threshold (LT) may not be the wisest approach. Finally, we should generally encourage the use of Aave V3 instead of V2. One of the reasons for the growth of this large position in V2 is due to the overly conservative RV parameter in V3, which prevented seamless migration. V3 has a significant advantage in allowing for more fine-grained management.
In summary, while we should indeed monitor and manage risks, it is crucial that we do so in a way that respects the principles of DeFi and the functionality of our protocol. In our view, there is currently no strong need for governance to take any action. We want to make it clear that we will vote against any hasty plan that only responds to social media comments.