Research Summary
The article discusses the potential risk of liquidation of $131M worth of $CRV if the price drops by 35%. The founder of Curve has borrowed $110M in stablecoins against all his $CRV, which accounts for 50% of the circulating supply. This situation could have severe implications for DeFi, with lending protocols at risk of accruing bad debt. To mitigate these risks, new deposits and loans have been paused on Aave V2, and there is an active governance proposal to freeze $CRV assets on Aave V2. The current buy-side liquidity across ETH and stablecoins is only $51M, which is just 42% of the liquidatable amount on Aave and FraxLend combined. If liquidation occurs, there isn’t enough on-chain liquidity to market sell Egorov’s position without drastically affecting $CRV prices, which would likely lead to bad debt across lending protocols, including Aave, Frax, and Abracadabra. Additionally, there is a structural imbalance towards the sell side with 530k $CRV tokens, or 0.06% of the circulating supply, being distributed to investors and as staking rewards to LPs daily. This could contribute to volatility and further price pressures on $CRV.
Actionable Insights
- Monitor Regulatory Developments: Keep an eye on the governance proposal to freeze $CRV assets on Aave V2. This could limit further risk exposure and mitigate potential damages due to market liquidity concerns.
- Assess Investor Behavior: Be aware of the structural imbalance towards the sell side. The daily distribution of 530k $CRV tokens to investors and LPs could contribute to volatility and further price pressures on $CRV.
- Stay Informed on Exchange Activity: Monitor the liquidity situation closely. If liquidation occurs, the lack of on-chain liquidity could drastically affect $CRV prices and lead to bad debt across lending protocols.
