Aave and Abracadabra Announce Proposals to Mitigate Risks from Curve Founder’s Loans

The turbulent days of Curve Finance and its CRV token are far from over. Lending projects are now proposing measures to reduce exposure to loans collateralized by CRV.

Abracadabra’s AIP 13.5 Proposal

Abracadabra has announced the AIP 13.5 proposal, aiming to impose higher interest rates on loans collateralized by CRV tokens. This proposal comes in response to the exploit incidents, which have put Curve Finance founder Michael Egorov’s loans at significant liquidation risk.

"Abracadabra initiated the AIP 13.5 proposal: Abracadabra is currently exposed to significant amounts of CRV risk. A strategy is proposed to apply collateral-based interest to both CRV cauldrons." — Wu Blockchain (@WuBlockchain) August 2, 2023

The proposal considers two key metrics: the total borrowed amount and the collateral ratio. If the total borrowed amount is between $10 million and $18 million, an interest rate of 200% will be applied. Similarly, if the collateral ratio falls below 70%, the interest rate multiplier will be 25x. This multiplier decreases as the collateral value drops, with liquidation occurring if the ratio falls below 40%.

This approach prepares Abracadabra for a sharp decline in CRV prices and a collateral ratio dropping below 100%. By imposing high interest rates, the project aims to quickly recoup the loan value. All collected interest will be transferred back to Abracadabra’s Treasury.

Current Status of Loans on Abracadabra

As of 02:00 PM on August 02, 2023, Egorov's outstanding debt on Abracadabra is approximately $13 million. Upon approval of the proposal, a 200% base interest rate will likely be applied to Egorov’s loan.

Aave’s Proposal to Reduce CRV Loan-to-Value

Aave, another lending platform with significant loans from Egorov, has proposed reducing the Loan-to-Value (LTV) ratio for CRV collateral to 0% on its V2 version on Ethereum. This change means CRV-collateralized loans will no longer be available for borrowing.

"Gauntlet released a proposal that would reduce the CRV LTV on Ethereum Aave V2 to 0 to prevent additional (new) borrowing against existing CRV collateral due to the recent decline in CRV liquidity." — Wu Blockchain (@WuBlockchain) August 2, 2023

This proposal has a 14-hour waiting period before the voting process begins. However, some forum members argue that suddenly reducing the LTV to 0% might backfire and disrupt liquidity supply chains.

Previous Warnings from Gauntlet

This is not the first time Gauntlet has warned about the risks from CRV-collateralized loans. In June 2023, the risk assessment firm proposed freezing Egorov's assets and reducing the LTV to 0%. However, this proposal was ignored at that time.

Immediate Steps for Michael Egorov

Egorov has 1-2 days to address liquidity issues and repay loans to avoid mass liquidations. On the afternoon of August 01, on-chain data revealed that Egorov made OTC agreements to alleviate liquidation pressures on lending platforms.

Conclusion

As lending platforms implement measures to mitigate risks from Egorov’s loans, the future stability of Curve Finance and the broader DeFi market hangs in the balance. How these proposals are enacted and their effects on the market will be closely watched by the entire crypto community.