A malfunctioning reentrancy lock in Vyper 0.2.15 (a programming language designed for Ethereum that is meant to be more secure and readable than Solidity) led to the exploitation of a number of pools on Curve.
This caused a lot of volaility and uncertainty, as white hats began to attempt to recoup funds from other affected protocols. In total, $69m was exploited and the CRV price was hit hard, falling over 25% in the coming days.
Curve founder takes huge loans against CRV
Hacks in themselves aren’t great, but the falling price of CRV has provided a greater cause for concern. The founder of Curve, Michael Egorov, deposited much of his holdings (he owns approximately 47% of the circulating supply) to Aave.
At the time of writing, his wallet has $150m of CRV (258m at $0.58) with $50m of USDT borrowed against it on the Aave V2 market.
The reason for choosing Aave to take such loans is clear: with so much of a token that can be collateralised, Egorov was able to borrow a significant amount of capital without paying taxes, and without causing the price of CRV to fall.
In fact, given how thin the liquidity is for CRV at the moment, taking loans against CRV may allow him access to far more liquidity than if he were to simply sell.
Egorov bought two mansions in Australia for $40m
Curve’s founder has been enjoying the success of CRV as of late, having seemingly used much of the capital to splurge on luxurious mansion in Australia.
According to The Block, he and his wife have spent over 59m AUD on a pair of mansions in Melbourne. The largest, known as Avon Court, was purchased for 41m AUD and comes replete with nine bedrooms, two swimming pools, a 10-car garage, a 4,000 bottle wine cellar, and two roof terraces with panoramic city views.
What happens now?
There are a few different scenarios that can play out from here with regard to the position on Aave.
The first scenario, and the one that many in the space are hoping for, is that the CRV price stays about $0.40 or so; otherwise, Egorov will get liquidated. It is also possible that he chooses to pay down the loan, and there are some tentative signs that he intends to do this. In addition to already paying down loans a little, he appears to have sold some CRV OTC to characters like Justin Sun (quelle surprise), Cream Finance, and Machi Big Brother. These deals are allegedly “handshake agreements” wherein those who bought the CRV are not allowed to sell for 3-6 months or unless the price breaks above $0.80.
However, the second scenario is that the CRV price continues to fall and he is unable or unwilling to repay his loan. In such a scenario, he would be forced to sell almost nine figures of CRV into liquidity pools with less than $10m, which would completely decimate the value of CRV. Some have speculated that he will liquidate his $59m AUD home Avon Court, but this seems unlikely given that it was purchased in his wife’s name.
The hacker currently holds around 7.2m CRV valued at over $4.1m, which could be sold at any time and would bring the price of CRV right down to Egorov’s liquidation level (shown in 1inch screenshot below).
Either way, this entire debacle has already been hugely problematic for the Curve community considering the uncertainty that it has caused for the token price, which is integral to the success of Curve’s ability to pay for liquidity provision. Their TVL has also collapsed, meaning that the protocol won’t generate as much in fees.
Moreover, it has raised a lot of questions for Aave, with many people asking why Aave allowed CRV to be listed as collateral in the first place — there have been protestations for years now over the centralised nature of CRV holdings. The CRV position can’t be liquidated at a reasonable value, meaning that Aave will likely suffer large losses. It remains to be seen how Aave will deal with this if this scenario plays out, but it could well involve liquidating some stAAVE from their safety module.
It seems ironic that these two DeFi giants, who both have such a strong focus on liquidity, are currently suffering because of CRV’s relative lack of liquidity. Frax and Algebra, where the founder has also taken out loans against his CRV, have already proposed that loans against CRV collateral face much higher interest rates than more stable assets like ETH. Quantstamp had already warned Aave that CRV could be a risk, and Gauntlet recently proposed that Aave should block further borrowing of CRV in order to mitigate further risk (this has now been implemented).
In the case of SBF, there was a lot of critique about the way in which he took out huge loans against his own token, FTT. There are some similarities in these two stories: two founders are both able to pledge their tokens as collateral in order to access far more than they would have been able to if they’d just sold their equity. The difference in this case is that it wasn’t theft from customer funds that allowed the bad loans to be given out, but apparent negligence in the governance of lending protocols. Aave should never have allowed CRV to be listed as collateral if it can’t effectively liquidate it. Why did they set a maximum deposit cap of 300m CRV?!
There are many factors at play with this situation and it isn’t yet clear how it is going to be resolved, but for now it may be wise to reduce exposure as it unfolds. Has Egorov made a mistake? Or was Aave just part of an exit plan? All eyes on $0.40…