Whose fault is it that Curve was hacked and caused a series of DeFi accidents?

Article written by Daniel Kuhn

Article compilation: Block unicorn

**The behavior of Curve founder Michael Egorov is a warning to everyone, and it also proves that DeFi (decentralized finance) is not much different from traditional finance. **

DeFi didn’t really “die” yesterday. No protocol actually crashes or tokens go to zero - although that's a distinct possibility. Interconnected economies of lending platforms, exchanges, trading vehicles without intermediaries are still technically functioning.

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 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 personal loans in liquidation. in danger.

A few months ago, Michael Egorov used a lot of leverage on CRV tokens, which he acquired as the founder of Curve, one of the most used decentralized exchanges. In one of the loans, on open lending protocol Aave alone, Michael Egorov put down roughly 34% of the total CRV token supply to lend out $63 million worth of the stablecoin. Additionally, he lent out a whopping 460 million CRV tokens — 47% of the total supply — in exchange for $110 million elsewhere.

On Sunday, hackers targeted more than three of Curve's trading pools, increasing the pressure on mortgages. 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 start a vicious cycle, causing CRV prices to keep falling, forcing other loans to go into liquidation, driving CRV down even further.

Known as a “death spiral,” CRV is used as collateral in the DeFi ecosystem, and its impact could paralyze the entire DeFi industry.

However, none of this happened due to a series of behind-the-scenes deals Michael Egorov made last night with wealthy traders like TRON founder Justin Sun. He managed to pay off some of his debt and propped up the price of CRV (currently around $0.60).

Others are pushing platform founders like Aave’s CEO Stani Kulechov to intervene in the market — not by disabling the protocol, but perhaps using Aave’s insurance fund or in extreme cases launching a security module (Aave’s stakers actually pay to participate) system).

Who did it wrong?

This is not the first time a DeFi giant like Michael Egorov has been bailed out, nor is it the first time the cryptocurrency industry has suffered losses due to poor judgment.

What’s more, it can be argued that Michael Egorov did nothing wrong: he followed the preset rules of some lending platforms, executing the cryptocurrency version of a tax-cut trick popular throughout the tech industry. If “virtual billionaires” like Peter Thiel can apply to banks to borrow against the equity they’ve built or invested in startups like Facebook, why can’t cryptocurrency founders do the same? This is the nature of permissionless financial games.

However, considering that DeFi is almost on the verge of extinction, it is worth asking some serious questions. Why was Egorov allowed to accumulate almost half of the total CRV supply - which on the face of it runs counter to DeFi's supposed egalitarian goals?

Why didn't someone step in earlier? Why allow such a critically important agreement to be threatened? Why do lending protocols like Aave or Fraxlend/Frax lending (Michael Egorov's loan is smaller but riskier), don't have a cap on the amount or percentage of tokens people can borrow?

Perhaps most importantly, as my colleague Shaurya Malwa suggested, why do "rich developers" wait until the last minute to act? It's not a secret. Research team Gauntlet issued warning signs about Michael Egorov’s highly leveraged financial positions back in January, although 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 dangerous loans, but because they thought they should have a larger equity stake in Curve because 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, an assistant professor at University College Dublin, said: The idea of DeFi is not to build democratically, but only "as long as it works."

While Michael Egorov's situation doesn't spell the end of DeFi, it's more than just a "wound" in the space. It shows that DeFi has been internally dead for many years.

This post could also be written as a heroic narrative of Michael Egorov's intervention, and the combined action of industry players (who don't always align naturally) to save a very important platform.

Yesterday, Michael Egorov ran some trading strategies to cover his bad debts — he repaid a $5.13 million FRAX stablecoin loan with money he found almost from under a couch cushion. Michael Egorov did not respond to a request for comment on this, but he clearly understands the seriousness of the situation, and in many ways, I'm glad he's made it through.

Justin Sun took $2 million of USDT out of his position on Aave to buy about $2.9 million in off-exchange CRV tokens that could easily become worthless - sort of Should he be praised for his selfless act?

After all, Your Excellency Justin Sun, every time he is in a crisis in the industry, he will stand up and say "save this crisis". But none of this is a true heroic rescue. If DeFi was once truly different, it is now being manipulated by a small group of people with huge capital. If it was indeed transformative before, it is now of little use to the average cryptocurrency holder, who is far from being able to make money from liquidity mining and who is often overwhelmed by transaction fees and impermanence that is temporarily beyond comprehension loss consumed.

There is a real tendency in crypto media and crypto twitter that every time something goes wrong in the industry, it is 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 is gone, is the financial pain even real? Not for me, but look at how annoying Caroline Ellison is (CEO of Alameda, also SBF's girlfriend).

Is it justified to be indifferent to the ever-present crime and catastrophe, since cryptocurrencies are effectively fake internet money, and is it a mistake to assign any meaning to them beyond that?