By Daniel Kuhn
Compile: Block unicorn
The behavior of Curve founder Michael Egorov is a warning to everyone and proves that DeFi (decentralized finance) is not much different from traditional finance.
DeFi didn’t really “die” yesterday. No protocol actually crashes or goes to zero - although that is a distinct possibility. The interconnected economy of lending platforms, exchanges, and trading instruments without intermediaries is still functioning on a technical level.
But the spirit that drove DeFi forward, the dream of disintermediating financial power and providing users with easy access to a variety of basic and complex financial products, has disappeared. This is not caused by the U.S. Securities and Exchange Commission (SEC), but by DeFi itself.
On Monday, following a series of attacks on several DeFi platforms, including systemically important Curve Finance, Curve founder Michael Egorov found himself in a precarious position, with hundreds of millions of dollars in his personal loans in liquidation in danger.
A few months ago, Michael Egorov used a lot of leverage on CRV tokens that he had earned as the founder of Curve, one of the most used decentralized exchanges. In one of the loans, only on open lending protocol Aave, Michael Egorov put down approximately 34% of the total supply of CRV tokens to lend $63 million worth of the stablecoin. Additionally, he loaned a whopping 460 million CRV tokens — 47% of the total supply — elsewhere in exchange for $110 million.
Last Sunday, hackers targeted more than three Curve trading pools, increasing pressure on mortgage loans. If the CRV token falls below a certain price (around $0.35), it will trigger an automatic sale of Michael Egorov’s loan collateral. This could trigger a vicious cycle, causing CRV prices to continue to fall, forcing other loans into liquidation, causing CRV to fall further.
Known as the “death spiral,” CRV is used as collateral in the DeFi ecosystem, and its impact could paralyze the entire DeFi industry.
However, none of that happened last night thanks to a series of behind-the-scenes transactions by Michael Egorov with wealthy traders like TRON founder Justin Sun. He successfully paid off some of the debt and supported CRV’s price (currently around $0.60).
Others are pushing for platform founders like Aave CEO Stani Kulechov to intervene in the market — not by disabling the protocol, but perhaps tapping Aave’s insurance fund or, in extreme cases, launching a security module (which Aave’s stakers actually paid to participate in system).
Who is wrong?
This isn’t the first time DeFi giants like Michael Egorov have been bailed out, nor is it the first time the cryptocurrency industry has suffered losses due to poor judgment.
What’s more, it’s fair to say that Michael Egorov did nothing wrong: he followed some of the lending platform’s preset rules, performing the cryptocurrency version of a tax-cutting trick that’s popular throughout the tech industry. If “virtual billionaires” like Peter Thiel can apply to borrow money from banks by mortgaging the equity they accumulated from founding or investing in startups like Facebook, why can’t cryptocurrency founders do the same? This is the nature of permissionless financial games.
However, considering DeFi is almost on the verge of extinction, it’s worth asking some serious questions. Why was Egorov allowed to accumulate almost half of the total supply of CRV – which on the surface is completely contrary to DeFi’s purported goals of equality?
Why wasn't someone involved earlier? Why allow such a critical and important agreement to be compromised? Why don't lending protocols like Aave or Fraxlend/Frax Lending (Michael Egorov's loans are smaller, but riskier) put a cap on the amount or proportion of tokens one can lend?
Perhaps most importantly, as my colleague Shaurya Malwa suggests, why do "rich developers" wait until the last minute to take action? It's not a secret. Research team Gauntlet raised warning signs about Michael Egorov’s highly leveraged financial positions back in January, even though their formal proposal to freeze CRV on Aave V2 failed. The venture capitalists behind ParaFi, Framework, and 1kx even filed a lawsuit against Egorov this year, not because he was saddled with risky loans, but because they believed they should have a larger share of Curve's equity since they were early investors.
The simple answer is: this is DeFi’s problem. Although DeFi is based on a series of technological innovations, open source and interoperable protocols, it faces the same fundamental problems as the traditional financial industry. Greed prevails and hypocrisy becomes the norm. As Paul Dylan-Ennis, assistant professor at University College Dublin, said: The idea of DeFi is not to build democratically, but just "as long as it still works."
Although Michael Egorov’s situation did not lead to the end of DeFi, it was more than just a “wound” in the space. It shows that DeFi has been dead on the inside for many years.
This article could also be written as a heroic account of Michael Egorov’s intervention, and the combined actions of industry players (who don’t always naturally align) to save a very important platform.
Yesterday, Michael Egorov engaged in some trading maneuvers to cover his bad debt – he paid off a $5.13 million FRAX stablecoin loan with money he practically found under his couch cushions. Michael Egorov did not respond to a request for comment, but he clearly understands the gravity of the situation, and in many ways, I'm glad he got through it.
Justin Sun used $2 million in USDT from his position on Aave to purchase approximately $2.9 million in over-the-counter CRV tokens that could easily become worthless — something of a Should he be praised for his selfless act?
After all, Mr. Sun Yuchen, every time he is in an industry crisis, he will stand up and say "save this crisis." But none of this is a true heroic rescue. If DeFi was ever really different, it is now controlled by a small group of people with huge amounts of capital. If it was indeed transformative before, now it is of little use to ordinary cryptocurrency holders, who are far from making money through liquidity mining and who are often inundated with transaction fees and temporarily incomprehensible vagaries. loss consumed.
There’s a real trend in the crypto media and on crypto Twitter that every time something goes wrong in the industry, it’s discussed as just another moment of chaos. We’ve all been so fed up with disaster information on the internet that we can’t even comprehend that $70 million has disappeared. Is the financial pain even real? Not to me, but look how annoying Caroline Ellison is (CEO of Alameda and SBF's girlfriend).
It makes sense to take a nonchalant attitude toward ever-present crimes and disasters, and since cryptocurrencies are essentially fake internet currencies, is it a mistake in itself to attribute any meaning to them beyond that?
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