Abracadabra Money Increases Interest Rates to Manage Risk
Abracadabra Money, a cross-chain lending platform, recently proposed increasing the interest rate on its outstanding loans to manage risks associated with its exposure to Curve DAO (CRV). This decision garnered mixed reactions from the community, with some questioning the modification of loan terms, while others applauded the plan to reduce exposure to CRV.
The Abracadabra protocol enables users to mint Magic Internet Money (MIM) — a United States dollar-pegged stablecoin — by leveraging interest-bearing assets such as CRV, Convex Finance (CVX), and Yearn.finance (YFI) as collateral. Spell Token (SPELL) is the native governance and staking token of the Abracadabra platform.
Michael Egorov, founder of Curve Finance, has close to $100 million in loans across various lending protocols backed by 427.5 million CRV, which is 47% of the total circulating supply of CRV tokens. He also has 51.65 million CRV collateral and 14 million MIM debt positions on Abracadabra.
Abracadabra is exposed to a considerable amount of CRV risk due to recent exploits on the decentralized finance (DeFi) protocol, leading to a liquidity crisis. This incident altered the liquidity conditions that led to the listing of CRV as collateral on Abracadabra.
Collateral-Based Interest for CRV Cauldrons
In order to address the issue, CTSI Crypto, a DeFi protocol, has proposed to apply collateral-based interest to both CRV cauldrons. Cauldrons allow users to borrow MIM using another asset as collateral, with each cauldron being collateral specific.
The improvement proposal called for an increase in the interest rate to reduce Abracadabra’s total CRV exposure to around $5 million in borrowed MIM. This proposal aims to apply collateral-based interest similar to what the decentralized autonomous organization (DAO) did with the Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH) cauldrons. All interest will be charged directly on the cauldron’s collateral and will immediately move into the protocol’s treasury to increase the reserve factor of the DAO.
The DeFi protocol proposal estimated that for an $18 million principal loan amount, the base rate would be 200%. At this interest rate, the loan would be fully covered within six months. The proposal noted that the base rate would decrease as the principal is repaid.
CRV Exposure and Governance Rug
Voting for the proposal opened on Aug. 1 and concluded on Aug. 3, with 99% of the votes cast in favor of the proposal by publication. This drew various reactions from the crypto community, including Frax Finance executive Drake Evans who called it a governance rug.
The proposal was also supported by many, who claimed that it could help the lending protocol eliminate CRV exposure. As the price of CRV is undergoing a stress test, the risk of a token dump has increased, and many lending protocols are looking for ways to clear their CRV exposure.
The crypto world, including DOGELON, DDX, Dappradar, DIA, CTSI, Crypto.net, Crypto.com, and DCG, have been actively discussing the implications of Web 3.0, also known as the decentralized internet.
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