🟣 Those Are Rookie Numbers

The Curve Finance founder, Michael Egorov, is swimming in some deep water.

GM x 3 = A great start to the day.   The Curve Finance founder, Michael Egorov, is swimming in some deep water. Yours truly briefly discussed the situation in yesterday's newsletter, but let's dive in deeper.   By now, Egorov's loans taken out against CRV collateral, currently totaling ~$87M, have become infamous within the degen crypto community. These loans have returned to haunt him once again as Curve was hacked yesterday, with over $70M of tokens drained, although some of these tokens were obtained by whitehat hackers and MEV bots. Nevertheless, this naturally led to the CRV price plummeting, down ~20% since the exploits started.    As the collateral value decreases relative to the loan value, Egorov moves closer to liquidation. Currently, the position comprises an Aave v2 loan totaling ~$54M, ~$14M of loans open on Abracadabra, a ~$9M loan on Fraxlend, a ~$9M loan on Inverse, and a ~$1M loan on Silo, all of which are open against CRV collateral. In aggregate, Egorov has borrowed ~$87M against ~400M CRV, valued at ~$235M at the moment. The CRV collateral accounts for ~44% of the circulating supply.   The Curve hacker(s) possesses ~$4.2M CRV and likely can't sell the tokens through CEXs due to KYC restrictions. This means that they would have to dump tokens onchain, and currently, the market depth for CRV is poor as the CRV/ETH pool on Curve was exploited. Most of the CRV onchain liquidity is located in Uniswap v3 on Ethereum, and the TVL across pools where the hacker(s) could reasonably exit their CRV position to liquid assets is ~$5.5M. Simply put, if the hacker(s) were to sell their position, the price impact would be huge. Even on CEXs, the liquidity is nothing to celebrate. On Binance, where most CRV volume occurs, the (2%) depth is at ~$550K.   Since market participants know that onchain liquidity is thin and Egorov could be in trouble, this creates reflexivity where investors dump tokens and short perps, which causes the price to decrease more, leading to the loan position becoming more dangerous, causing more investors to sell, etc. If Egorov defaults on one of his loans, he'll likely default on the rest of them as well since the CRV collateral would have to be liquidated, meaning that sell pressure would be coming from both anticipating investors as well as the liquidators.    Most of Egorov's capital is most likely tied up in illiquid assets, and it's clear that he's struggling to get his hands on capital that he can use to pay down his debt. Most recently, the Curve founder has started doing over-the-counter ("OTC") CRV deals by withdrawing collateral from Aave and quickly paying down the position once he has been paid for the associated OTC deal. As of 7 AM (EST), ~39.3M CRV has been sold OTC against ~15.8M USDT, implying a blended OTC price of ~$0.4.    The aforementioned, together with a fFRAX/crvUSD Curve pool (see Chart of the Day) deployed by Egorov, have successfully stabilized the situation for now. Currently, the liquidation price on the Aave v2 loan is ~$0.36, while it's ~$0.32 on Fraxlend. If you ask me, Egorov's loans will survive to see another day, but this likely isn't the last time the loans cause havoc in the space.   – Brick   Okay ladies and gents—Permissionless II is coming up in mid-September.   We would love to see you all join the Blockworks family in Austin, TX, for the world's largest DeFi event of the year! Don't FOMO in before it's too late. FOMO in now. More information and tickets can be found here. Funny enough, the Aave loan isn't Egorov's biggest concern at the moment. Instead, it's the third largest loan acquired through Fraxlend that poses the biggest danger because the platform utilizes a Time-Weighted Variable Interest Rate. Earlier today, the utilization rate was almost at 100%, meaning that the interest rate would have roughly doubled every 12 hours, going from ~81% to ~10,000% in under four days. This would have led to a liquidation event quickly, even without the CRV price decreasing. However, this calculation also exaggerates the effect because the utilization never reaches exactly 100%. Even small utilization decreases from 100% lead to a vast slowdown in the interest rate increase.   Nevertheless, at the time of writing, the borrow APR is only at ~86%, and the utilization is down to ~54%—so what happened? First, Egorov tried to lower the utilization rate by paying down the debt to Fraxlend, but this was unsuccessful because users seemed to hunt his position by removing liquidity immediately as a repayment came into the pool. Thereafter, Egorov came up with an intelligent solution. He spun up a fFRAX/crvUSD pool on Curve and seeded it with 100K of CRV rewards. fFRAX represents Fraxlend's CRV/FRAX LP token, which is the underlying liquidity Egorov is borrowing. This incentivized liquidity into the Curve pool as LPs could earn a high APR in CRV, therefore creating a liquid secondary market for the underlying lenders to exit through. The fFRAX/crvUSD pool's TVL is currently ~$6.3M and offers a CRV APR of ~50%. As a result of a liquid secondary market, users were willing to deploy liquidity into the Fraxlend pool that currently offers a lend APY of ~72%, while Egorov has been paying down his FRAX debt. 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