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The game of liquidity providers, how to solve Curve’s debt problem?

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Curve will have to go through another stress test when OTC CRV becomes liquid.

The original author: @DeFi_Made_Here

Translated by: Luccy, BlockBeats

Editor's note:

Alphabeth Capital analyst and Good Entry consultant @DeFi_Made_Here posted an article on social media analyzing the challenges and potential risks facing the Curve ecosystem, as well as the debt pressure faced by founder Mich.

@DeFi_Made_Here introduced the debt problem of Mich and the design limitations of CRV in the tweet, while expressing full expectations for the future of Curve. He believes that Mich is one of the most talented developers in the space and will continue to innovate to promote the sustainable development of the ecosystem. In addition, the article also analyzed the short-selling transactions of @0xSifu, the largest liquidity provider for Curve, to speculate on the future development of Curve. BlockBeats translated the original article as follows:

CRV is like a time bomb, and the Curve ecosystem is currently controlled by "suspicious individuals or entities", while Mich has the ability to repay the debt that grows by $1.7 million per month.

Next, I will explain why I saw the light of hope and how @0xSifu participated in this game.

In August, Mich held approximately 50% of the circulating supply of CRV, but due to the inability to sell (due to lack of liquidity, negative image, etc.), he had to borrow cash using non-liquid tokens as collateral.

Everything was going relatively smoothly until Curve was exploited and the price of CRV began to decline. Mich was close to liquidation, but he was unable to fulfill his public commitment to repay his debts when necessary.

Due to insufficient liquidity to settle his loan positions, the currency market has almost fallen into a bad debt situation. Lenders began to withdraw their assets and the annualized interest rate on loans began to rise. The worst situation occurred in the CRV/Frax pool, where utilization reached 100%.

At 100% utilization, Fraxlend's interest rate doubles every 4 hours. To reduce utilization, Mich has deployed a new Curve pool and metric:

A 2-pool consisting of CRV/FRAX LP tokens composed of crvUSD and Fraxlend, with an initial reward of $100,000 in CRV.

This does not lower the interest rate. Mich's only remaining option is to sell CRV at a discount for over-the-counter trading to repay the debt. 231 million CRV were sold at a price of $0.4, with a total sales price of $92 million, and a handshake agreement was reached not to conduct over-the-counter trading before February 2024.

For the complete list of trading partners, please refer to the screenshot below. It includes: @wintermute_t, @DWFLabs, @dcfgod, @machibigbrother, @justinsuntron, and others.

Mich has obtained enough stablecoins to repay part of the debt and reduce the borrowing interest rate. The market has stopped panicking, but most lending protocols are unwilling to bear too much risk related to CRV, so they have tightened their policies.

Mich can still borrow on @InverseFinance, @CreamdotFinance, @fraxfinance, and @aave v3. But the biggest help comes from @SiloFinance, who intentionally or unintentionally forked their own protocol to create a CRV/crvUSD market for Mich.

Therefore, Mich once again used CRV as collateral for a loan. This time, he borrowed 75 million US dollars, allocated as follows:

· Silo: 46.5M (from him and related wallets)

· Fraxlend: 15.1MFraxlend: 15.1 million US dollars

· Others: 13.4M

The borrowing interest rate in Silo (and Fraxlend) is as high as 30%, which means paying $18.5 million in interest annually. In order to maintain lower borrowing rates and provide more liquidity, Mich incentivizes and bribes the Silo pool through @pendle_fi and @Penpiexyz_io.

However, is anyone taking the risk to provide liquidity for Mich?

Except for those who obtain boost rewards through Pendle deposits, the largest liquidity provider is @0xSifu, who earns a 30% return on stablecoins, and there is one more important thing.

He is shorting CRV. This puts greater pressure on the price, Mich, and lenders. If there are no more depositors in the pool, Sifu can begin withdrawing liquidity from the pool and continue shorting CRV.

After my tweet yesterday, Mich wrote in the Telegram group that he learned someone was shorting with Silo's CRV. He increased the utilization rate, making it very expensive, and Sifu repaid some of the CRV.

If my theory is correct, Sifu can start squeezing Mich in a way similar to Avi:

· Reduce available liquidity to push up interest rates.

· Shorting CRV to liquidate Mich

Sifu can single-handedly push utilization to 100%, causing interest rates to rise to over 1100% in a short period of time. At the same time, he can open a short position for CRV on perpetual contracts, waiting for off-exchange CRV buyers to sell (off-exchange buyers profit 25%-50%).

We can anticipate situations similar to what happened in August. When people start withdrawing funds and selling CRV to protect themselves, Mich almost lost everything, but people with vested interests saved him.

But let's assume that @0xSifu is a good actor, and he will simply repay his CRV debt and continue to provide liquidity for Mich. Buyers in off-exchange transactions will not take similar actions. Does CurveFinance have a future?

I have been criticizing the CRV model and claiming that it is unsustainable. Although with the introduction of crvUSD, the situation of Curve is expected to improve, the liquidity providers of crvUSD are also unsustainable.

The liquidity provider of crvUSD is directly incentivized by Mich using CRV. Obviously, this will not last forever, especially when the CRV price continues to decline. However, Mich was inspired by ve33 DEXes and proposed an idea to only distribute crvUSD revenue to LPs who vote in support of crvUSD. The cost of crvUSD accounts for nearly half of DAO revenue, so the incentive for crvUSD liquidity providers will be very attractive.

In addition, there will also be an isolated lending pool with the crvUSD liquidation algorithm. There is not much information about this, but crvUSD will not be supported by the currency in the pool.