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CRV Founder's Cashout and Collateralization Behavior Raises Concern: From Shorting Cost to Market Impact

LD Capital

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How did the CRV Long/Short War unfold last year?

Original Author: Yilan, Invest&Research@LD Capital

Recently, the Curve founder's cash-out behavior and ongoing CRV collateralization for stablecoin lending have become a focal point of market attention as liquidity was affected by the SEC event. To analyze CRV's on-chain shorting cost, feasibility, and related impacts, let's first review how shorting was conducted during last year's CRV long and short battle.

Shortly after last year's FTX incident, when the market lacked confidence and liquidity was extremely scarce, a whale borrowed a large amount of CRV tokens from Aave, transferred them to the OKX trading platform, and borrowed a total of 47 million CRV. Influenced by the whale's market-selling short position, the CRV price dropped from $0.545 to $0.424, a 21.88% decline, reaching a low of $0.4. This operation involved leveraging on-chain borrowing and token transfers to suppress the price through large-scale shorting.

Subsequently, founder Michael bought CRV to push up the price. Although the Aave account was exposed to liquidation risk, shorts still had profit potential. One profitable method was to conduct high-leverage short trades on platforms like OKX, taking advantage of a high-probability profit opportunity in a low-liquidity market environment with little strong bullish interference. Another profitable method was to convert short positions into long positions. When market liquidity was depleted, shorts would close their positions and go long instead.

After the CRV long and short game event, Aave discontinued CRV borrowing (i.e., it was no longer possible to continuously increase leverage through the same on-chain loop lending for shorting).

In addition, centralized exchanges also provided opportunities for borrowing to short.

Currently, the CRV token's chip distribution is as follows: Curve dex holds 116 million, Binance holds 65.47 million, OKX holds 12.56 million, and other centralized exchanges hold a total of 53.29 million.

It can be seen that centralized exchanges hold a large amount of CRV tokens, accounting for 15% of the total circulation. However, without centralized exchange data, the potential cost of shorting behavior cannot be calculated.

Currently, the total on-chain liquidatable amount of CRV is $113 million, with 99% (289 million CRV) concentrated around $0.375. This implies that borrowing to short could be enough to push the price down to the liquidation price, but the Curve founder has the ability to add collateral to keep pushing the liquidation price lower, making the cost of pure shorting very high.

Aave Initiates CRV and CRV Liquidation Levels

However, in reality, this volume of CRV is not able to be liquidated by anyone, so if Aave wishes Michael repaying his loan, lowering the CRV borrowing pool LTV is the right risk control measure, but the LTV should not suddenly change to 0, as this would significantly increase Aave's bad debt risk.

Although the on-chain methods for borrowing CRV are limited, on-chain CRV spot selling pressure is high, and, over the past 6 hours, shorting activity on centralized exchanges has increased significantly (190%+ APY on BN to short CRV), OI increased by 5 million in two hours, 14 million in 24 hours.

The CRV founder has currently lent out over $44 million worth of stablecoin on AAVE, Abracadabra, Fraxlend, Curve, Inverse Finance; if liquidation (for specific information on liquidation price, refer to the previous thread) occurs, these lending platforms face potential default risks.

However, in fact, for this volume, Aave will liquidate in the event of significant slippage, so lowering the CRV borrowing pool LTV is the right risk control measure, but it should be gradually decreased and should not suddenly change the LTV to 0, as this would significantly increase Aave's bad debt risk.

Yesterday, the founder Michael withdrew over 7 million wCRV (25%+) from Fraxlend, deposited it into Inverse Finance (fixed borrow rate 6.84%) at address 0x73f8af created by Inverse Finance's FiRM CRV market, where the Curve founder has pledged at least over 6 million wCRV, currently over 9 million wCRV TVL in the Inverse Finance CRV pool, mostly pledged by the CRV founder.

Additionally, in Abracadabra, another 4 million CRV continues to be pledged, with nearly 80 million CRV in the Abracadabra CDP.