Over the past few days, the DeFi space has been buzzing with news of a significant leveraged position in CRV tokens across major lending protocols. The focus is on a wallet associated with Michael Egorov, co-founder of Curve Finance, a decentralized exchange. As of June 16, this wallet holds a staggering $60 million debt in stablecoins, secured by CRV tokens worth $176 million.
Egorov has collateralized his CRV tokens on Aave, the largest lending protocol in the DeFi ecosystem, which boasts an impressive total value locked (TVL) of nearly $8 billion. While his position is currently safe from liquidation, risk management firm Gauntlet has advised Aave’s governance to freeze the CRV market on Aave V2. This freeze would prevent Egorov or any other participants from adding additional CRV tokens as collateral on the platform.
Unfortunately, CRV tokens have experienced a significant drop of almost 30% in the past month due to the overall decline in altcoins. This downturn has reignited concerns over Egorov’s substantial position, prompting Gauntlet’s efforts to mitigate potential risks.
The core danger Gauntlet aims to address is the possibility of Aave acquiring bad debt. This scenario could arise if the price of CRV plummets to a level where the Aave protocol must liquidate Egorov’s position but fails to do so due to its sheer magnitude.
The problem lies in the fact that Egorov’s collateralized CRV tokens in Aave V2 make up over 33% of the total circulating supply. If his entire position were to be liquidated, it would create an inadequate on-chain liquidity situation, rendering the liquidator unable to sell the CRV tokens profitably. In fact, attempting to sell 100 million CRV tokens on the mainnet, equivalent to roughly one-third of Egorov’s position, could cause the price to plummet by a staggering 70%.
Gauntlet has highlighted the reduced liquidity in CRV as a factor increasing the likelihood of disorderly liquidations. However, when contacted by The Defiant, the risk management firm declined to comment further on their recommendation.
Some speculate that Egorov may not intend to default on his debt, pointing to his past management of the position, including partial repayments. However, Egorov has yet to respond to a request for comment from The Defiant, though on-chain data indicates recent repayments of nearly $3 million.
Andrew Thurman, former head of communications at Nansen, doubts that Egorov plans to default on his debt, contrary to suggestions on Gauntlet’s forum. Thurman stated that Egorov has actively managed his position in the past. Meanwhile, Aiham Jaabari, co-founder of Silo Finance, another lending protocol, believes the concerns surrounding Aave’s potential bad debt are somewhat exaggerated. Jaabari suggests that other traders may have seized upon Gauntlet’s narrative to manipulate the price of CRV, citing a surge in funding rates for shorting CRV on Binance.
Although Jaabari has discussed Silo with Egorov, he notes that Silo currently lacks sufficient USDT liquidity to facilitate the migration of Egorov’s entire Aave V2 position.
In addition to Aave, Egorov has collateralized borrowing positions worth over $10 million on lending protocols Frax Finance and Abracadabra, as reported by DeBank.
Gauntlet’s apprehensions about leaving Aave with bad debt may stem from a highly profitable trading strategy executed last year by Avraham Eisenberg, who manipulated the CRV price by borrowing the asset against collateralized USDC. However, Jaabari states that after witnessing the consequences faced by Eisenberg, no one is attempting such tactics anymore. Eisenberg was charged with market manipulation by the SEC in January.
The DeFi community is closely monitoring the large leveraged position held by Michael Egorov in CRV tokens across major lending protocols. Gauntlet’s recommendation to freeze the CRV market on Aave V2 highlights concerns about the potential risks associated with Egorov’s debt. With the price of CRV tokens experiencing a recent decline and the sheer size of Egorov’s position, there is a need for careful risk management to avoid destabilizing the DeFi ecosystem.