Curve liquidation risk poses systemic threat to DeFi even as founder scurries to repay loans


On July 30, Curve Finance, a decentralized exchange on Ethereum, suffered a hack due to a vulnerability in certain pools built using the Vyper programming language.

The price of Curve DAO (CRV) dropped 20.91% on the day of the hack, falling to a two-month low of $0.58.

The next day, the decline in CRV continued to a seven-month low of $0.48 amid fears of liquidation of hefty loans worth $100 million taken by Curve Finance founder Michael Egorov against CRV as collateral.

However, positive developments such as partial repayment of loans and significant negative bets in the derivatives market suggest that CRV may rally in the short term.

The DeFi community comes to save CRV

On Aug. 1, Egorov sold 39.25 million CRV tokens for stablecoins to a number of notable decentralized finance investors like Justin Sun, Machi Big Brother and DWF Labs for a total of $15.8 million, according to Lookonchain data.

The buyers purchased CRV at $0.40 per token, a 25% discount to the market price at the time.

Egorov also partially paid his Tether (USDT) loans on Aave, reducing the principal from $63.20 million to $54.1 million, per DeBank data. The partial repayment of the loan comes as a positive step in reducing the liquidation risk.

Currently, Egorov’s loans on Aave will be liquidated if the CRV price falls to $0.36 or lower, per DefiLlama.

Related: Vyper vulnerability exposes DeFi ecosystem to stress tests

CRV price analysis

The derivatives position of CRV traders suggests that the token may rally in the short term as a contrarian bet.

The funding rate for CRV perpetual swaps, which represents the relative demand for long or short positions, shows traders are actively shorting CRV, as its funding rate fell to -0.1% for eight-hour intervals, per CoinGlass data.

It raises the possibility of a short squeeze in the market, where short holders are forced to buy CRV as its price rallies.

The CRV/USD pair is trending near multiyear lows at around $0.50. If buyers are able to build support at this level, the price can rally in the short to medium term toward the horizontal resistance levels of $0.78 and $1.23.

CRV/USD price analysis. Source: TradingView

A long trade definitely comes with risks, as the hackers are still sitting on 7.1 million CRV tokens worth $4.5 million. If the attackers convert their holdings into stablecoins or more liquid tokens such as Bitcoin (BTC) or Ether (ETH), the price may revisit this week’s low, around $0.48.

Moreover, while Egorov has lowered the liquidation risk slightly, the risk is still not eliminated completely.