Crypto Analyst: Aave Should Freeze Curve Founder's CRV Tokens

Author: DeFi Made Here, Encryption Analyst; Translation: Jinse Finance xiaozou

On June 12, 2023, Gauntlett initiated a proposal in the Aave governance community, proposing to freeze the CRV tokens in the loan position in the wallet address of Curve Finance founder Michael Egorov. Gauntlet said it checked the risk profile of the wallet in question, which relies heavily on CRV tokens as collateral. The account is said to be related to Curve Finance founder Michael Egorov, and according to on-chain data, the account borrowed about $63 million in USDT with 288 million CRV tokens (approximately $180 million) as collateral. It should be noted that 288 million CRV tokens account for more than 30% of its total circulation. In order to prevent bad debts caused by the decline in the liquidity of these tokens on the exchange, it is recommended to freeze them.

I support Gauntlet's proposal to freeze CRV on Aave v2.

The CRV market is kind of dangerous for Aave and doesn't make any sense at all. Of Aave’s 306 million CRV tokens, 289 million were stored by the Curve Finance founder, who lent out $63 million of the stablecoin. Do you want to know why?

The benefits of borrowing against your own tokens convey the following message:

• CRV prices will not drop.

• "Founders Didn't Dump".

• Lower slippage compared to dumping on the open market.

• You can also lend more money if the price goes up.

In November last year, Avi (Note: The crypto trader is Avraham Eisenberg, he is called Avi on Crypto Twitter) intends to manipulate the market to liquidate Michael Egorov (Curve founder), but the result is not as desired. CRV's borrowing has since ceased.

As such, Michael Egorov is pretty much the only lender of CRV on Aave, and he is taking stablecoins from a shared lending pool.

Michael Egorov also mortgaged CRV on the Frax Finance lending market, MIM Spell, and Inverse Finance to lend stablecoins (approximately $44 million in stablecoins have been lent).

But Aave can't just set the LTV to 0 to force repayment. The reasons are as follows:

The problem was that no one was able to liquidate his 412 million CRV position (~$268 million). Selling 10 million CRV on-chain alone will result in a slippage greater than 21%.

And it's hard to believe that Michael Egorov himself would repay the loan in the event of a real threat of liquidation. Who would voluntarily give up USD for worthless tokens?

So, if you change the LTV suddenly, you will only create bad debts. There will be no liquidators, happy owners of new Australian mansions (Note: Curve founder Michael Egorov has just bought a mansion in Australia for a huge sum of money) will not sell their mansions for CRV.

What's the best approach for Aave and the rest of the lending market? That is:

• Prohibition of further CRV mortgages.

• Gradually start reducing the LTV of the CRV market (say 1% per week).

In this case, Michael Egorov may repay part of the debt to a lower level of liquidation, thereby creating a risk for these borrowing markets. At least he won't be able to increase his ~$110 million leverage in CRV, which only has $24 million in on-chain liquidity. I know I'm going to get some piss and critique for saying this, but you have to understand that this kind of leveraged position is enough to kill Curve.

Why do I say that if the price of CRV drops, it may destroy Curve? Because it is a farming token, its TVL is closely related to the price of CRV.