A Deep Dive into the Curve Finance Exploit and Its DeFi Implications


On July 30th, the DeFi ecosystem witnessed an event that sent shockwaves through the market. Curve Finance was exploited, with almost $65 million worth of tokens drained. The aftermath of this event has left Michael Egorov, Curve Finance’s founder, in an unenviable position. This deep analysis explores the intricate details of the situation, the repercussions across the DeFi landscape, and the desperate attempts to avert a catastrophic financial meltdown.

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Timeline of Egorov’s Growing Debt

Initial Involvement with Aave v2

The seeds of the present crisis were sown back in October 2020, when the Curve team proposed adding CRV as collateral to Aave v2. Egorov started borrowing against CRV, reaching a position size of ~$2M by February 2021. From then on, the total debt snowballed, drawing attention and scrutiny.

Expanding Across Platforms

In response to a reduction in LTV on Aave, Egorov expanded his lending position across Abracadabra, Fraxlend, and Inverse Finance. By the day of the exploit, he had taken out over $100M worth of loans against 430M CRV collateral, accounting for almost 50% of the circulating supply.

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The Cascade Effect and Reflexivity

The on-chain CRV liquidity being thin, coupled with Egorov’s troubles, created reflexivity within the market. As investors dumped tokens and shorted perps, the price of CRV continued to decrease, leading to the loan position becoming even more dangerous. The liquidity crisis was unfolding in real time.

The Fraxlend Dilemma

Ironically, Egorov’s primary concern wasn’t the Aave loan but rather a loan acquired through Fraxlend. Utilizing a Time-Weighted Variable Interest Rate, the utilization rate neared 100%, threatening liquidation within days.

Temporary Solutions and Ongoing Challenges

Egorov attempted to lower the utilization rate by repaying some of the debt and seeding a new pool on Curve. While this temporarily reduced the utilization rate, the borrow APY remains dangerously high at ~46%. Over 50M CRV have been sold OTC, with Egorov paying down almost $30M of principal. Yet, ~$85M worth of loans remain.

Controversial Proposals and Preemptive Liquidation

Most recently, a controversial proposal by Abracadabra governance threatens to hit Egorov with a base interest rate of 200%. This structure, akin to preemptive liquidation, would likely force Egorov into more OTC deals.

Conclusion: The Potential Domino Effect

If Egorov defaults on one of his larger loans, he may very likely default on the rest, leading to massive sell pressure from investors and liquidators. The implications for the DeFi vertical could be severe, given the close ties with Curve’s native token.

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This ongoing event illustrates the fragility, complexity, and interconnectedness of the DeFi space. The Egorov situation is emblematic of broader systemic risks, highlighting the need for caution, transparency, and robust governance within decentralized finance. It’s an unfolding story that everyone in the crypto space should monitor closely. The resolution or lack thereof could define the future direction of decentralized finance.