CRV Liquidity Crisis Spreads to DeFi

On July 30th, Curve Finance's liquidity pool was attacked, resulting in a liquidity crisis for its token, CRV. Curve Finance is a decentralized exchange (DEX) primarily focused on stablecoins, providing services such as lending and trading through smart contracts.

Currently, over $100 million worth of DeFi tokens are at risk due to multiple stablecoin pools that support pricing and liquidity for the entire ecosystem being drained by hackers. Michael Egorov, the founder of Curve Finance, has been providing liquidity for CRV in an attempt to stabilize it and address the spreading crisis within the DeFi ecosystem. However, the overall risk remains unchanged.

AAVE Community Debates Proposal to Halt CRV Lending

Risk management firm Gauntlet has recently taken action to address this issue and proposed that AAVE halt lending with CRV as collateral. The community will vote on the proposal before August 5th and present potential solutions to tackle the ongoing liquidity crisis troubling the DeFi space.

Gauntlet believes that the continuous crisis in Curve stems from using CRV tokens as collateral and suggests preventing the crisis by temporarily suspending all lending activities. The proposal has been put forth on AAVE, and the AAVE community is discussing whether it would help AAVE withstand the escalating liquidity crisis.

Gauntlet's risk mitigation recommendation is gaining support from the user community. PennBlockchain, an organization at the University of Pennsylvania aimed at curious students in blockchain and cryptocurrencies, supports Gauntlet's proposal to set the CRV Loan-to-Value (LTV) ratio to zero, effectively avoiding further borrowing.

CRV Caught in a Vicious Cycle

Currently, Egorov, the founder of Curve Finance, has 267,432,866 CRV tokens as collateral and $54 million USDC debt on Aave V2. If there are bad debts, users in the AAVE community will also be affected and suffer losses. Therefore, from a self-interest perspective, users tend to support the proposal.

However, if the proposal is approved, Egorov may sell CRV to repay his debts, triggering another round of selling pressure on CRV and further exacerbating the vicious cycle. As of August 2nd, Egorov has already sold 54.5 million CRV tokens through various channels, followed by another 7.5 million CRV tokens in an OTC sale on August 3rd.

Fortunately, Egorov's CRV token sales have taken place off-exchange, minimizing the impact on on-exchange trading. If they were on-exchange sales, panic selling could occur, causing a sharper decline in CRV's price. Currently, Egorov's CRV sales have not stopped, which could potentially lead to a situation where there are no buyers off-exchange, forcing sales on-exchange and making it difficult for CRV to maintain its strong support level at $0.4.

【CRV/USDT daily chart, source: TradingView】

The upcoming discussion results within the AAVE community need close attention. If CRV lending is temporarily suspended, it will push Egorov to continue selling CRV. Allowing lending to proceed would provide some relief. However, it is also important to monitor developments on other lending platforms and the health of Egorov's borrowings to prevent new complications from arising.