Will Curve CEO’s large cashout behavior trigger a butterfly effect?
Will Curve's CEO's cashout cause a ripple effect?
Journalist Jessy Blocked
Recently, the CEO of Curve has been under scrutiny for frequently cashing out CRV tokens that were pledged as collateral.
The cause of the matter is that SEC regulation has caused the crypto market to experience sustained low liquidity, resulting in a continuous decline in CRV prices, which fell more than 23% in a week. Earlier, Michael Egorov, the founder of Curve, was exposed for pledging 288 million CRV tokens (approximately 33% of the circulating CRV) as collateral and borrowing about $63 million USDT on Aave. It seems that this was done to avoid the risk of the stablecoin loan being liquidated. After CRV dropped more than 17% on the Saturday before last, Michael Egorov deposited 38 million CRV on the decentralized lending platform Aave to stabilize the price of CRV.
According to DefiLlama data, if the price of CRV falls to $0.372 on the CRV market on Aave v2, the 288 million CRV tokens in this loan will face liquidation risk. However, with Michael Egorov’s strong support, as of June 19, its health factor has recovered to 1.72.
In fact, Michael Egorov pledged 288 million CRV on AAVE as part of the CRV collateral lending for stablecoins. Chain data shows that Michael Egorov has CRV collateral loans on four lending protocols including Aave. Currently, Michael Egorov has pledged $269 million in CRV and borrowed $100.3 million in stablecoins.
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Users have many questions: Why does Michael Egorov hold so much CRV? What was the stablecoin he borrowed used for? Will the founder’s large cash-out behavior have any impact on the protocol? Should his behavior be regulated, and if so, how?
Crazy Large Loans
According to chain data, as of June 19th, Michael Egorov’s positions in various DeFi protocols are as follows:
Collateralized nearly $177 million in CRV on Aave and borrowed $60.48 million USDT (this loan has been partially repaid in recent days, with the earliest collateral amount being 288 million CRV and the current amount being 285 million);
Collateralized $49.76 million in CRV on Abracadabra and borrowed $20.45 million in MIM;
Fraxlend mortgage 27.94 million US dollars of CRV and borrow about 12.71 million FRAX;
Inverse Finance mortgages 14.72 million US dollars of CRV and borrows 6.66 million DOLA.
He has currently mortgaged a total of 269 million US dollars worth of CRV and borrowed 100.3 million US dollars worth of stablecoins. The total amount of CRV borrowed and lent is 433 million, while the circulating supply of CRV is approximately 853 million. In other words, Michael Egorov once held over 50% of the circulating CRV supply.
In the initial token distribution mechanism, 62% of the tokens were allocated to liquidity providers, and 30% were allocated to shareholders (the team and investors). Michael Egorov roughly obtained a large amount of CRV by providing liquidity early on and as a co-founder of the team. Currently, Michael Egorov’s wallet still receives a large amount of staking rewards every day.
These large mortgages have caused panic about liquidation in the face of declining market liquidity and a sharp drop in CRV prices. Liquidation itself is not scary, but the chain reaction it causes is. In Defi lending, because the price of virtual currencies fluctuates greatly, it is generally borrowed by over-collateralizing another virtual currency. When the collateralized virtual currency drops significantly, there is actually no motivation for the borrower to repay (because the price of the borrowed virtual currency, especially stablecoins, is higher than the collateralized asset), and bad debts will appear in the pool. Just like traditional finance, auctioning off collateralized assets is needed to balance the books. In Defi, these collateralized assets are bought by liquidators.
Clearing on DeFi is done at market price, which can be understood as once the clearing line is reached, these collateralized assets will be sold at market price, and the price of CRV will further decline. In times of poor market liquidity, this can cause panic selling by investors.
For example, Michael Egorov, the founder of Curve, borrowed the largest single loan of USDT using 33% of the market’s circulating supply of CRV on Aave. According to DefiLlama data, in the CRV market of Aave v2, if the CRV price falls to $0.372, this large collateralized loan of 285 million CRV will face liquidation risk. The health factor of this loan is currently 1.7.
If it is really liquidated, what may happen is the panic caused by the huge selling pressure of the funds, and people will sell CRV one after another. In order to cope with the run on funds in the pool caused by this selling pressure, Michael Egorov is currently depositing more CRV to increase the excess mortgage rate of CRV. For example, after CRV fell by more than 17% last Saturday, Michael Egorov deposited 38 million CRVs into the decentralized lending platform Aave to stabilize the price of CRV.
According to on-chain analysis, Michael Egorov has been active in the lending market in recent days. He has been using his CRV to borrow from various sources, and then repaying Aave to prevent liquidation on the largest platform. The following figure shows some of Michael Egorov’s borrowing and repayment operations on June 17. In four minutes, Michael Egorov first withdrew a certain amount of CRV in Aave V2, and then borrowed a certain amount of DOLA by depositing this CRV into Inverse, and then converted DOLA into USDT through Curve’s currency exchange mechanism. Finally, he repaid USDT to Aave v2. After such a set of operations, it seems that a part of the USDT was repaid to Aave v2. But in fact, he is still borrowing with CRV. Perhaps it is the public opinion that is focusing on Michael Egorov’s largest loan on the Aave platform, so Michael Egorov is making “emergency small” repayments.
Founder of suspected cash-out and unfulfilled promises to investors
What did Michael Egorov do with the stablecoins he borrowed? According to Lookonchain’s analysis, Egorov sent USDT worth 37.7 million US dollars to the cryptocurrency exchange Bitfinex, and USDC worth 51 million US dollars to the market maker agreement Wintermute Trading.
According to Australian Financial Review, Michael Egorov and his wife Anna Egorova recently spent 41 million US dollars to buy Avon Court, a luxury mansion in Melbourne, setting a record for the highest transaction in Victoria’s real estate market since this year. In addition, this couple bought a two-story five-bedroom Italian-style mansion for 18.25 million US dollars last March.
The Avon Court Victorian mansion covers an area of 4,251 square meters and has nine bedrooms, seven bathrooms, a gym, a steam room, two swimming pools, a playground, an underground garage that can park 10 vehicles, and six kitchens.
Founder Michael Egorov was able to loan stable coins through a large CRV mortgage while simultaneously selling large amounts of USDT, which could be difficult to avoid suspicion of cashing out. In traditional financial markets, if someone wants to use stock as collateral for a loan, the company must have a certain stable trading volume in the market, and the lending institution must ensure that the collateralized shares have sufficient liquidity to be cashed out. When the value of the collateralized stock drops by a certain percentage (usually 30%), the borrower needs to increase the number of collateralized stocks to make up for the difference.
In the stock market, the act of major shareholders mortgaging their shares for loans will cause high panic in the market during a bear market. The stock price will be hit hard, and the panic selling of the public will further reduce the value of the collateral, and a series of chain reactions will occur. Therefore, the mortgage behavior of major shareholders is required to be disclosed in a timely and proactive manner to let investors make decisions.
In DeFi, is it possible to regulate similar behaviors? Compared to traditional finance, due to the transparency on the chain and a series of coded mechanisms, the impact of such behavior on the entire ecosystem of DeFi will be relatively small compared to this behavior in the traditional stock market.
DeFi risk manager Gauntlett once suggested to the Aave governance community to freeze Michael Egorov’s wallet address with CRV tokens in it. Gauntlet stated that it checked the risk status of the wallet, which heavily relies on CRV tokens as collateral.
Whether such a suggestion will be adopted is a test of the community’s governance abilities, and even if it is adopted, how much deterrence does it have on Michael Egorov? After similar situations occur, if there seems to be no way to avoid and solve problems like Michael Egorov’s large-scale cashing out through on-chain and community governance mechanisms. Michael Egorov’s behavior hurts people’s naive emotions, and people think that as a founder, he should not mortgage and cash out such large amounts. He should seem to be dedicated and responsible for the project. However, as a founder, if he uses the Defi-set mechanism to obtain a large amount of CRV, there is nothing wrong with it.
However, offline laws can still regulate Michael Egorov’s illegal activities in the real world. Currently, Michael Egorov himself is being sued by three well-known crypto risk investment companies, BlockingraFi, Framework Ventures, and 1kx, for alleged fraudulent and misappropriation of trade secrets, which has caused them significant economic losses.
They accused Michael Egorov of getting rich through fraud, depositing the plaintiffs’ funds into Curve’s liquidity pool, and receiving CRV tokens and fees as rewards for providing liquidity. He also sold millions of dollars worth of CRV tokens (which the plaintiffs claim belong to them). The three VCs stated that they did not receive promised Swiss Stake equity, and their nearly $1 million in funds was never returned, nor did they receive tens of millions of dollars worth of CRV that they claimed to be entitled to.
In other words, if it is true, the return he promised to investors as a liquidity provider in the early days was not fulfilled. Therefore, some of the CRV in his hands were not legally obtained.
Michael Egorov was the co-founder and CTO of NuCypher before founding Curve and worked on event infrastructure construction at LinkedIn before that. He has a background in physics and has worked in fields closely related to quantum computing and cryptography. In addition, he won a bronze medal in the International Physics Olympiad in 2003 and graduated from the Moscow Institute of Physics and Technology.