CRV Token Leverage Raises Concerns As DeFi Leaders Face Mounting Debt

Over the last few days, the DeFi space has been abuzz with news of the significant leverage position in CRV tokens across major lending protocols. The focus is on wallets linked to Michael Egorov, co-founder of Curve Finance, a decentralized exchange. As of June 16, the wallet has a staggering $60 million in debt in stablecoins, backed by $176 million worth of CRV tokens.

Egorov has pledged his CRV tokens on Aave, the largest lending protocol in the DeFi ecosystem, which boasts an impressive total locked value (TVL) of nearly $8 billion. While its current position is safe from liquidation, risk management firm Gauntlet has advised Aave’s governance to freeze the CRV market on Aave V2. This freeze will prevent Egorov or other participants from adding additional CRV tokens as collateral on the platform.

Unfortunately, the CRV token has seen a significant drop of almost 30% in the last month due to the decline in altcoins as a whole. The downturn has reignited concerns over Egorov’s substantial position, fueling Gauntlet’s efforts to mitigate potential risks.

The core danger Gauntlet is looking to address is the possibility of Aave acquiring bad debt. This scenario could arise if the CRV price plummeted to a level where the Aave protocol had to liquidate Egorov’s position but failed to do so due to its size.

The problem lies in the fact that the CRV tokens guaranteed by Egorov in Aave V2 make up more than 33% of the total circulating supply. If all positions were to be liquidated, it would create a situation of insufficient on-chain liquidity, rendering liquidators unable to profitably sell CRV tokens. In fact, an attempt to sell 100 million CRV tokens on the mainnet, equivalent to roughly a third of Egorov’s position, could cause the price to plummet by up to 70%.

Gauntlet highlighted reduced liquidity at CRV as a factor that increases the likelihood of disorderly liquidations. However, when contacted by The Defiant, the risk management firm declined to comment further on their recommendation.

Some have speculated that Egorov may not have intended to default on his debts, pointing to his past management of his position, including partial payments. However, Egorov has yet to respond to a request for comment from The Defiant, despite on-chain data showing a recent payout of nearly $3 million.

Andrew Thurman, former head of communications at Nansen, doubts that Egorov plans to default on his debt, contrary to advice on the Gauntlet forum. Thurman stated that Egorov actively managed his position in the past. Meanwhile, Aiham Jaabari, co-founder of Silo Finance, another lending protocol, believes the concerns surrounding Aave’s potential bad loans are somewhat exaggerated. Jaabari points out that other traders may have taken advantage of Gauntlet’s narrative to manipulate CRV prices, citing the jump in funding levels for shorting CRVs on Binance.

Although Jaabari has discussed Shiloh with Egorov, he notes that Shiloh currently lacks sufficient USDT liquidity to facilitate the migration of Egorov’s entire Aave V2 position.

In addition to Aave, Egorov has secured more than $10 million worth of loan positions on lending protocols Frax Finance and Abracadabra, as reported by DeBank.

Gauntlet’s concern about leaving Aave with bad debt may stem from a highly profitable trading strategy executed last year by Avraham Eisenberg, who manipulated CRV prices by borrowing assets against USDC collateral. However, Jaabari stated that after witnessing the consequences Eisenberg faced, no one would ever attempt such tactics again. Eisenberg was charged with market manipulation by the SEC in January.

The DeFi community is closely monitoring the huge leverage position held by Michael Egorov in CRV tokens across major lending protocols. Gauntlet’s recommendation to freeze the CRV market on Aave V2 highlights concerns about the potential risks associated with Egorov’s debt. With the recent decline in CRV token prices and the size of Egorov’s position, there is a need for careful risk management to avoid destabilizing the DeFi ecosystem.