Bessie Liu

An unidentified trader, believed to be Mango Markets exploiter Avraham Eisenberg, accumulated a roughly 92 million token loan of CRV, the native token of Curve Finance, over a period of six days. But rather than pay back the loan, <a href="https://blockworks.co/news/curve-stablecoin-crv-loan" target="_blank" rel="noreferrer noopener">the trader allowed a total of about $63.6 million in USDC collateral to be liquidated</a>, Tuesday.



Assets on Aave each have a liquidation threshold — a percentage at which a loan will be considered undercollateralized if reached.&nbsp;



In this latest case, the liquidation threshold for USDC was <a href="https://docs.aave.com/risk/v/aave-v2/asset-risk/risk-parameters" target="_blank" rel="noreferrer noopener">88%</a>, which meant that once the value of the borrowed CRV rose above 88% of the USDC collateral supplied to Aave, liquidators stepped in to sell the USDC, buy back CRV and close the debt position.



But there was a problem: There wasn’t enough CRV liquidity to allow that to happen expeditiously. Instead, the position was closed over the course of 50 minutes through <a href="https://etherscan.io/tokentxns?a=0x57e04786e231af3343562c062e0d058f25dace9e&amp;ps=100&amp;p=1" target="_blank" rel="noreferrer noopener">385 individual</a> mini-liquidation transactions.



This left Aave with 2.64 million CRV, roughly $1.7 million, in bad debt — borrowed CRV that will never be repaid.&nbsp;



An Aave team member said that this deficit can be covered with the protocol’s treasury holdings.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">First of all, the bad; of course leaving bad debt is never pleasant. It is a small amount and still a fraction of the tvl of the protocol. The governance has many means to cover it without incurring in any liquidity problem. But, it&#39;s a (relatively cheap) lesson 🔽&mdash; thΞ3d.lens.eth( 👻, 👻) (@The3D_) <a href="https://twitter.com/The3D_/status/1595122277854904325?ref_src=twsrc%5Etfw">November 22, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Aave’s native token (AAVE) dipped to roughly $50 as the protocol began to accrue bad debt, but has since fully recovered, trading at almost <a href="https://blockworks.co/prices" target="_blank" rel="noreferrer noopener">$56</a> at the time of writing, according to data compiled by Blockworks.



This latest exploit, however, poses a big question for Aave, Matt Fiebach, a Blockworks research analyst, said.



“The scary part about the situation is not that Aave took a hit for $1-$2 million in bad debt but rather the same design flaw is exploitable with other tokens,” Fiebach said.



Blockworks asked Eisenberg if, in his view, Aave was vulnerable to a similar attack, to which he responded, “I do not view this as an attack on either side.”



Eisenberg declined to comment further on his role in the trades, if any, except to note, “it’s a matter of public record that a founder of Curve had a nine-figure, leveraged-long CRV position on Aave.”



Last week, Eisenberg <a href="https://twitter.com/avi_eisen/status/1593078192033918977" target="_blank" rel="noreferrer noopener">called</a> Curve a “ponzi,” deriding its CRV-emitting liquidity incentive mechanism. Curve&#8217;s founder, Michael Egorov, is <a href="https://etherscan.io/address/0x7a16ff8270133f063aab6c9977183d9e72835428" target="_blank" rel="noreferrer noopener">known to have</a> a nine-figure CRV stash on deposit in Aave that could become vulnerable if the price of CRV fell sharply.



Although it is uncertain what the next steps for Aave are, the protocol <a href="https://twitter.com/AaveAave/status/1595168980993556480?t=xNRSVZ7Q_lX1RmoKNgrFmQ&amp;s=31" target="_blank" rel="noreferrer noopener">tweeted</a> that the community would be initiating discussion in response to this incident.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">1/6 We want to address the cycle of liquidations that occurred in the CRV pool on the Aave Protocol today. The liquidations were successful (and worked as designed), but unfortunately, the size of the position left some excess debt within the protocol.&mdash; Aave (@AaveAave) <a href="https://twitter.com/AaveAave/status/1595168980993556480?ref_src=twsrc%5Etfw">November 22, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



It is possible that the protocol will make changes to its liquidation threshold — as <a href="https://governance.aave.com/t/discussion-reducing-long-tail-asset-risk/10748?u=monet-supply" target="_blank" rel="noreferrer noopener">proposed</a> by community contributor <a href="https://twitter.com/MonetSupply" target="_blank" rel="noreferrer noopener">monetsupply</a> — as a lower liquidation threshold correlates to less bad debt collected.&nbsp;



The community could also choose to implement limitations on the number of illiquid coins that can be borrowed on the platform.&nbsp;



Another option is to curtail rehypothecation.



Unlike some other lending markets such as Fraxlend or Silo, Aave rehypothecates collateral posted by its clients — meaning that it uses tokens posted on its platform and lends them out to others.&nbsp;



Although this increases capital efficiency — as more tokens can be borrowed — the protocol then faces the risk of not being able to liquidate collateral in the event of a price drop.



The Aave community <a href="https://governance.aave.com/t/discussion-reducing-long-tail-asset-risk/10748?u=monet-supply" target="_blank" rel="noreferrer noopener">will likely</a> be implementing short-term action to prevent further exploits.&nbsp;



“Speed is [essential] on this issue,” community member jarnMod <a href="https://governance.aave.com/t/discussion-reducing-long-tail-asset-risk/10748?u=monet-supply" target="_blank" rel="noreferrer noopener">wrote</a>. “Please consider quick and decisive reaction to the problem…If you can’t solve it [outright], at least mitigate this risk or communicate more.”



An Aave spokesperson declined to comment beyond the public tweets on the incident.



This story was updated on Nov. 22, 2022, at 6:15 pm ET.



Macauley Peterson contributed reporting.



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Feature or Flaw? Aave Left With $1.7M in Bad Debt

Macauley Peterson

Exchange liquidity protocol Curve has launched its first native stablecoin — crvUSD.



The news coincided with a trader borrowing most of the available Curve DAO token (CRV) on Aave, over $50 million worth. The spike in the price of CRV over the past 8 hours put that position very close to — and eventually over — its liquidation point.



The trader is presumed to be Avraham Eisenberg, <a href="https://blockworks.co/news/mango-dao-readies-42m-to-make-users-whole">previously linked to the controversial exploit</a> of Mango Markets on the Solana network, <a href="https://twitter.com/LlamaCollege/status/1594695900634284033">based on Discord discussions</a> related to the trade.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Mango &#39;very profitable trading strategist&#39; <a href="https://twitter.com/avi_eisen?ref_src=twsrc%5Etfw">@avi_eisen</a> has an $8m short on CRV.<a href="https://twitter.com/CurveFinance?ref_src=twsrc%5Etfw">@CurveFinance</a> founder <a href="https://twitter.com/newmichwill?ref_src=twsrc%5Etfw">@newmichwill</a> has $48m of CRV supplied on Aave with a liquidation price of .259 Yesterday they had an interesting discussion in the Convex discord. 🦙🏫 ↓ <a href="https://t.co/t28vN9l2PZ">pic.twitter.com/t28vN9l2PZ</a>&mdash; LlamaCollege (@LlamaCollege) <a href="https://twitter.com/LlamaCollege/status/1594695893638598657?ref_src=twsrc%5Etfw">November 21, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Eisenberg did not immediately return a request to comment via Twitter.



The trader, or trading group, had about $58 million in USDC supporting a $50 million loan of CRV as of 12:20 pm ET on Tuesday.



<figure class="wp-block-image"><img decoding="async" src="https://lh6.googleusercontent.com/T01qGlFxSZpUAKbSfzoFRVSHEjE4qTrqvPTMVfc_bfqWUBYTnjd26wtWX0wSeMS0m-ZkHUcKhYBt8GV38-F-Nep2INNBdFXy7PrCZ7flnp3HgIOx0nifipwB_ScF90dcx8MxVjv1mbpGPzKVNNxaQpYzHz6j2a2JWHqajN_FT6N-tv8_LKCI0ZflaqgQMw" alt=""/><figcaption class="wp-element-caption">Trader&#8217;s position on Aave&#8217;s V3 Ethereum market as of 12:20 pm ET</figcaption></figure>



By 1:10 pm ET, all of that position was liquidated, leaving the Aave protocol with 2.64 million CRV — or about $1.7 million — in bad debt.



It’s not clear what the trade strategy was, but the Aave position was so large it could not be fully liquidated using the available collateral. That&#8217;s because the availability of spot CRV was limited enough that the value of <a href="https://blockworks.co/price/crv" target="_blank" rel="noreferrer noopener">CRV jumped</a> to a high of around $0.71 as the position was unwound, data collected by Blockworks shows.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The attack on <a href="https://twitter.com/AaveAave?ref_src=twsrc%5Etfw">@AaveAave</a> is over and the protocol is left with 2.64 million CRV in bad debt, currently valued at almost $2 million. Aave will now have to liquidate enough AAVE from from the safety module to buy back 2.64m CRV. <a href="https://twitter.com/avi_eisen?ref_src=twsrc%5Etfw">@avi_eisen</a> &#8211; the black hat financial engineer <a href="https://t.co/W4j75RymMb">pic.twitter.com/W4j75RymMb</a>&mdash; Matt Fiebach 🟪 (@MattFiebach) <a href="https://twitter.com/MattFiebach/status/1595118515203502084?ref_src=twsrc%5Etfw">November 22, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<h2>The Curve Finance stablecoin</h2>



Michael Egorov, Curve’s founder, previously <a href="https://blockworks.co/news/curve-stablecoin-is-in-the-works-despite-regulatory-scrutiny" target="_blank" rel="noreferrer noopener">said</a> the stablecoin will maintain its peg to the US dollar through overcollateralization.



Its <a href="https://github.com/curvefi/curve-stablecoin/blob/master/doc/curve-stablecoin.pdf" target="_blank" rel="noreferrer noopener">latest white paper</a> reveals that the stablecoin’s design will be executed through the Lending-Liquidating Automated Market Maker Algorithm (LLAMMA) which converts between collateral and the stablecoin. So, if the price of a collateral (ETH) dips, the automated market maker will convert deposits to a stablecoin (USD).



LLAMMA will automatically calculate bands to locate where the collateral sits, and if the price of the collateral changes, it will be converted to the stablecoin.&nbsp;



The crvUSD will maintain its peg to USD through a peg-keeping reserve that is formed by an asymmetric deposit (when the outcome of the deposit has more profit than loss or risk taken to achieve the profit) into a stableswap pool made up of the stabletoken and a redeemable reference coin or an LP token.



The timing of the launch <a href="https://twitter.com/0xMaki/status/1595122398155927552" target="_blank" rel="noreferrer noopener">is interesting</a> — it appears to have caused a sharp rise in the price of CRV, putting the collateral for the trader’s loan in danger.



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/fVehUH7bBg1hZMfw3ocrLz-tYE6-d2ZpmC3UKpCmZE-PYZeYrxoNR23Jr2tFd-P1fK38BIPaBTjK-qkUXMb38jlCDigAJlenVTC25v3NCXEEkZFfoewfcdGtFMGvpN_i_ZooCku51l4OFJsKMwX6xajSxibNqL-a82TjsV84yjEl8trlc6oR38A69LrcuQ" alt=""/></figure>



The owner of the wallet borrowing CRV <a href="https://etherscan.io/address/0xba529566855d9d0bf3de1cc988e5f529f92bd80c#tokentxns" target="_blank" rel="noreferrer noopener">transferred the tokens to OKX</a>, a Seychelles-based cryptocurrency exchange and derivatives exchange, but the subsequent use of those tokens is not known.



Eisenberg&#8217;s Twitter account <a href="https://twitter.com/avi_eisen/status/1595024418837000199" target="_blank" rel="noreferrer noopener">posted</a> that he was &#8220;taking the day off to spend time with family&#8221; but that appears to have been meant ironically, as his next tweet indicated he was very much monitoring the situation.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Couple more liquidations then up only&mdash; Avraham Eisenberg (@avi_eisen) <a href="https://twitter.com/avi_eisen/status/1595103248255717378?ref_src=twsrc%5Etfw">November 22, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Egorov maintains a large position on Aave using CRV as collateral, which some have speculated could have been the target of the trade — if the CRV was sold, creating a short position, which is unknown.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true"><a href="https://twitter.com/search?q=%24CRV&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$CRV</a> drama TLDR: If Avi liquidated, AAVE has to buy 80m CRV onchain = price up If Mich liquidated, AAVE has to sell 180m CRV onchain = price to 0&mdash; Sotto ✨ (@sotto_eth) <a href="https://twitter.com/sotto_eth/status/1595007650408058880?ref_src=twsrc%5Etfw">November 22, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



However, it could also be the case that a more complex strategy involved purposefully allowing the CRV loan to be liquidated, which forced Aave liquidators to buy back CRV using the trader’s USDC collateral.



The price of Aave initially dropped as bad debt began to accrue in the protocol, although it recovered fully once liquidation was complete and trades at about $55 as of 1:40 pm ET — flat over 24 hrs, <a href="https://blockworks.co/price/aave" target="_blank" rel="noreferrer noopener">data compiled by Blockworks</a> shows.



Aave&#8217;s team <a href="https://twitter.com/The3D_/status/1595123156821630976" target="_blank" rel="noreferrer noopener">expects to easily cover</a> the short fall with its treasury holdings.



This story was updated on Nov. 22, 2022 at 1:00 pm, 1:20 pm, 1:35 pm, 1:45 pm and 1:55 pm ET.



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Someone Paid 600% Interest on $50M To Borrow CRV, Then Watched It Get Liquidated

Sam Martin

Yearn Finance Launches YFI Buyback Program: Markets Wrap

<div id="highlights-block_617991074d6ee" class="highlights">
 <ul>
 <li>Even with the broader market sell-off today, CRV is up 55.45% over the last 30 days</li>
 <li>Curve is the second largest DeFi protocol by TVL and is the market leader in stablecoin exchange</li>
 </ul>
 
</div>



<a href="https://curve.fi" target="_blank" rel="noreferrer noopener">Curve Finance</a> (CRV) is a decentralized liquidity pool built on top of Ethereum, similar to Uniswap (UNI), but with a focus on the exchange of stablecoins. 



The main goals of Curve Finance are to facilitate extremely efficient trading, with low slippage and to provide a relatively low-risk and supplemental fee income for liquidity providers (LPs) without the risk of so-called impermanent loss — the opportunity cost of being an LP in volatile digital assets.



Despite the broader market sell off that occurred today, Curve has seen its TVL continue to expand as investors may be flocking to safety in stablecoins. The CRV governance token also trades at one of the lowest multiples when looking at the ratio of market capitalization-to-TVL, which currently sits at .09279.



<figure class="wp-block-image"><img decoding="async" src="https://lh3.googleusercontent.com/gjW2H_ZD2Vkxrzyxr43omJpvhw5-aHpu6Ue3WYbg3Q6LiGdz8EoYIGreZ1TNUh9Cb6UYIf31Z2d4wBXGmH9eLG3TQjJTEgTCJ14rAiM0esng62Pdcy8G3mfJ2Rw0ceQ7FYZlivBm" alt=""/><figcaption>Source: defipulse.com</figcaption></figure>



Over the past 30-day period, the CRV token has traded up 57.52% to $4.36 as of reporting. Some industry experts believe that the price action seen in CRV could be viewed as a precursor to a resurgence in DeFi.&nbsp;



“Curve is the backbone for a lot of other protocols that are farming CRV. For instance, Yearn is an integral part of Curve because a lot of the vaults are farming CRV. When the price of CRV goes up, it creates this reflexive loop where the higher the price goes, the higher the yield, and thus attracts more capital to be deposited by users.” Santiago Santos, prominent Web3 investor told Blockworks.



Santiago continued, “One of the unique components of CRV is this mechanism where users can lock their CRV in exchange for a boost in yield, which adds to this reflexive feedback loop.”



The way trading fees are set and allocated is voted on by the Curve DAO, which currently sit at .04% on all pools. Half of those fees accrue to LPs, and the other half is awarded to vote-escrowed CRV (veCRV) holders.&nbsp;



The veCRV token gives its holders access to participate in three different activities that are not open to CRV holders alone. These include participating in the Curve DAO, earning protocol trading fees, and boosting staking rewards, <a href="https://medium.com/coinmonks/investment-thesis-curve-dao-token-crv-796b68f13eba" target="_blank" rel="noreferrer noopener">according to</a> Coinmonks’ Andrew Krohn.&nbsp;



Because veCRV is locked for a predetermined amount of time (up to 4 years), an increase in veCRV supply results in a reduction of liquid supply and thus puts upward pressure on the CRV price, as Santiago alluded to previously. 



Currently, 47.6% of the CRV supply is locked up as veCRV as seen in the graph below:



<figure class="wp-block-image"><img decoding="async" src="https://lh5.googleusercontent.com/gXD2ZoXfF4YT-PUoMjLeCsE5QNKXq6d_9tEMWJsGm10NB6UTuVKlZkyH7ytYN7gEeVZJC50r6XwEqAd3b4cWB6SvsmbX5rh0TST3myIwkgYaxoiACQ4EG3Sa4mCRxoYJkdbg1iOU" alt=""/><figcaption>Source: defipulse.com</figcaption></figure>



The rise of <a href="https://www.convexfinance.com" target="_blank" rel="noreferrer noopener">Convex Finance</a> has also contributed to massive amounts of CRV being locked up for yield, with its TVL currently at $12.66 billion.



“So you have Curve itself, Convex (CVX), and then yield aggregating platforms like Yearn Finance (YFI) all working towards locking more of the CRV supply to increase user rewards (APY’s),” Joe DeTommaso, Investment Manager at CMS Holdings, told Blockworks.&nbsp;



As the supply of CRV becomes more illiquid the price goes up, yield aggregating platforms such as YFI see their APY’s increase, the fees generated and returned to token holders of the yield aggregators increases which in turn raises the price of the aggregators native tokens.