Curve Liquidation Risk Poses Systemic Threat to DeFi Crypto Market.
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, experienced an attack due to a vulnerability in certain pools created using the Vyper programming language.

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

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

Nevertheless, positive developments such as partial repayment of loans and significant negative bets in the derivatives market imply that CRV might 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 such as Justin Sun, Machi Big Brother and DWF Labs, resulting in a total of $15.8 million, according to Lookonchain data.

The buyers acquired CRV at $0.40 per token, which was a 25% discount to the crypto 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. This partial repayment of the loan is 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, according to DefiLlama’s AI analysis.

CRV price analysis

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

Data from CoinGlass shows that the funding rate for CRV perpetual swaps, which indicates the relative demand for long or short positions, is actively shorting CRV, as its funding rate fell to -0.1% for eight-hour intervals.

This raises the possibility of a short squeeze in the market, where crypto traders who are shorting CRV are forced to buy the token 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.

A long trade in the crypto market 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.

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