The Curve Finance Bailout and What it Means for the DeFi Platform
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The Curve Finance Bailout and What it Means for the DeFi Platform

What started as an up to $70 million smart contract exploit across Curve’s liquidity pools, introduced systemic risk to the wider DeFi ecosystem.
Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

On July 30th, a bug within the older version of the Vyper compiler resulted in a series of exploits. As the bug neutralized reentrancy protection, hackers could drain at least four Curve.fi liquidity pools. Curve.fi had established itself as the go-to stop for stablecoin swaps, introducing risk to the DeFi ecosystem.

Although some of the funds have been recovered by white hats (ethical hackers), at around $5.4 million in ETH, Curve.fi’s governance token, CRV took a sharp price drop. This typically happens when the integrity of the protocol’s smart contracts is questioned. 

Fears of contagion would have spread like wildfire if CRV price had inched closer to $0.368 per coin. Image courtesy of TradingView

This itself introduced another risk to Curve.fi (CRV) and the broader DeFi ecosystem, interconnected via liquidity pools. In addition to the Vyper programming language being used for other DeFi protocols, Curve’s founder Michael Egorov has considerable debt exposure in CRV tokens.

At around $80 million, Egorov’s debt accounted for ~47% of the existing CRV supply. Because liquidity pools have a utilization rate, as the percentage of total liquidity in the lending pool vs. the borrowed amount, Egorov’s interest rate skyrocketed sharply, threatening forced liquidation and Curve.fi’s stability.

Nonetheless, as evidenced by CRV price stabilization after the steep drop on Tuesday, Curve bailout is in the works. Erected CRV buying pressure is a bailout of one of the largest decentralized exchanges for stablecoins, holding $2.7 billion in assets. 

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DeFi’s Lehman Brothers Moment, Lite Mode

When Lehman Brothers collapsed in 2008, the investment bank had $619 billion in debt vs. $639 billion in assets, many of which were too illiquid to service the debt promptly. This eventually triggered the Global Financial Crisis of 2008.

Although Curve.fi’s domino, from an exploit to heavy founder exposure, is significant enough to introduce systemic risk, it is minor. After all, Egorov’s loan backed by CRV tokens is merely 3% of Curve.fi’s TVL. According to data compiled by @EmberCN, Egorov sold 34 million CRV tokens to four major entities.

Wintermute is the biggest bailout provider, having bought 25 million CRV. Founded by Ilya Volkov in London, Wintermute has been a prolific DeFi investor and liquidity provider for exchanges. 

Wintermute was followed by other notable investors with a stake in DeFi’s success. DWF Labs, a global market maker, and Gnosis Chain(xDai), an Ethereum sidechain specialized in prediction markets. 

DeFi Scene Gets Together to Provide Liquidity for Egorov’s CRV Sales

Likewise, Yearn Finance and Cream Finance are lending protocols that take heavy advantage of Curve.fi’s stablecoin liquidity pools. Suffice it to say, all listed investors erecting the CRV buy wall have a vested interest in ensuring Egorov’s potential contagion is neutralized. 

In the immediate aftermath of the CRV price drop, Egorov unloaded 5 million CRV to controversial Tron founder Justin Sun. Other notable individual investors include Jeffrey Huang, an NFT trader at 3.75 million CRV, and crypto trader DCFGod at 4.25 million CRV.

In addition to a total of 72 million CRV, at $0.40 per coin, Egorov also gained back 15.8 million in USDT stablecoin, having repaid 7.52 million MIM on Abracadabra and 6.1 million USDT on Aave, both lending protocols. Most of the Curve bailout purchases were conducted over-the-counter (OTC).

Altogether, Michael Egorov managed to sell 106 million CRV tokens for $42.41 million, leaving him with an outstanding debt of $65.34 million, according to Lookonchain analysis. Interestingly, much of the debt went into the purchase of not one but two Victorian mansions in Australia, as previously reported by Australian Financial Review.

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Do you think DeFi protocols should introduce borrow and supply caps to prevent similar single-investor exposures? Let us know in the comments below.