Spooked by Curve Liquidation Threat, DeFi Protocols Shore Up Defenses

They’re responding to the potential systemic risk posed by Michael Egorov’s teetering financial position.

AccessTimeIconAug 1, 2023 at 4:05 p.m. UTC
Updated Aug 1, 2023 at 5:30 p.m. UTC
  • Curve founder Michael Egorov’s borrows of millions against his CRV holdings threaten to destabilize a wide swath of DeFi.
  • Rather than wait for liquidation chaos, some protocols are taking active measures.

Decentralized finance (DeFi) protocols are angling to protect themselves from the hack of Curve Finance and the threat of potentially catastrophic liquidations.

Curve founder Michael Egorov’s penchant for borrowing tens of millions of dollars in tokens against his CRV holdings has pinned a handful of on-chain lending markets up against the wall. If the price of CRV falls too low and they’re forced to try and liquidate his collateral at a time when buyers are slim, they could sell low and suffer crippling debts – creating a systemic risk for all of DeFi.

The DAO that governs lending platform Abracadabra, from which Egorov had once borrowed $18 million, has decided it’s better to hold CRV through a crisis than to sell into a liquidation cascade. Last night, it approved an emergency measure to change how it tracks those tokens’ prices “to prevent any inadvertent selling of CRV tokens” that would accumulate bad debt. (DAO contributor Romy told CoinDesk the measure is temporary.)

Another area of focus for teams has been reinforcing the links that lock DeFi protocols together. Last night, a representative for the stablecoin-focused Reserve Protocol, which builds on top of DeFi majors, including Lido, Compound and Rocketpool, asked in their respective Discords for help to establish “a more robust incident response strategy” so that its developers can coordinate across teams during crises such as Curve.

For Nexus Mutual, an insurance-like service that offers users some protection against losses they suffer from hacks, the weekend assault on Curve will likely lead to a wave of new claims when it opens its portal on Wednesday. The protocol is encouraging its customers to “wait until more information is available” so that it can more accurately assess what they’re owed.

On Tuesday, after days of Egorov selling assets to pay back lenders, the mood across DeFi was hardly grim but perhaps still skittish. If the markets turned fast, he could get liquidated and wreck a retinue of protocols – like it or not.

When, in the Discord server for liquidity protocol Balancer, someone asked if it was safe to use its tool that plugged into Aave (where Egorov did the bulk of his borrowing), a team member advised that it probably was.

“If you do think that’s all likely to go down ... it will be Armageddon,” the contributor who goes by Tritium said on the server.

“I really don’t know where would be safu/better to just exit to mega-cap base assets and centralized stablecoins (get out of DeFi) all together until you feel better about the situation,” they wrote.

Edited by Nick Baker.


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Danny Nelson

Danny is CoinDesk's Managing Editor for Data & Tokens. He owns BTC, ETH and SOL.

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