Twitter Space recap: Curve's darkest hour?

Author: DODO Research

**DODO research on Twitter Space on August 1st invited DeFi Cheetah, Chen Mo, and BujiDAO raccoon to analyze and predict the crisis that Curve is going through. In the climax of the discussion, Curve represented Mr. Block and DODO co-founder Radar also contributed wonderful ideas. **

Curve Crisis Event Background

At around 10:00 p.m. on July 30, the community first issued an early warning that JPEGd was under attack because the reentrancy lock of the Vyper language was invalid. Within an hour, Alchemix, MetronomeDAO's protocol and Curve-related pools suffered the same reentrancy attack. Around 11:00, the price of $CRV panicked and fell. Immediately afterwards, Curve officially announced that the three stable pools of Vyper 0.2.15 were attacked, but the crvUSD related pools were not affected. Vyper also issued a document confirming that Vyper versions 0.2.15, 0.2.16 and 0.3.0 have vulnerabilities.

At 10 a.m. on the 31st, Curve reported a loss of more than 50 million US dollars, Curve TVL dropped by more than 40%, and the lowest price of $CRV on the chain reached $0.08. When the incident further escalated, it triggered a market panic about the liquidation of the founder's large CRV loan position, and Chainlink's offer also sparked heated discussions. Afterwards, the founder repaid the loan one after another, and traded $CRV through OTC to ease the liquidation pressure.

What is the fundamental problem with the Curve crisis? Will the founders be liquidated? The guests started a discussion on this.

**Q1: What is the root problem of Curve's crisis? **

DeFi Cheetah：

**Curve's crisis started with problems with the Vyper compiler, which sent the coin price down and sparked fears that Curve's founders were at risk of liquidation. **

Curve's decentralized concept and its non-upgradable liquidity pool hinder a timely response to the crisis. The liquidity migration process from the old pool to the new pool is cumbersome and costly, and the team has no emergency stop mechanism. When hackers successfully breached Curve’s pool, it further sparked panic in the community, speculating that the hack could put founders’ large amounts of collateral at risk of liquidation.

BujiDAO Little Raccoon:

Curve did not make a low-level mistake this time, because most projects will not check Vyper's language level when doing audits.

But the reason why Curve’s problem has a big impact this time is because the team overlooked some obvious problems. For example, in June, the security team proposed to adjust the LTV of CRV on AAVE, but Curve did not give a clear solution .

Chen Mo:

CRV has faced a liquidation crisis many times, but the Curve community did not see this as a problem, this time due to FUD and liquidity issues, it made the crisis more serious. At the same time, the attack triggered by **Vyper oracle should be regarded as a wake-up call that a deep inspection of the logic at the language level is required. **

From the perspective of the founder, there are risks in the complete disclosure of the position. However, in this incident, some CRV was sold through OTC, the chips became more decentralized, and the debt was alleviated. It is possible to completely solve this problem. If Curve can get out of this crisis, it may no longer be threatened by liquidation points in the future, and the impact on the brand and TVL will also be lifted.

Q2: Views on Curve OTC selling coins

BujiDAO Little Raccoon:

OTC selling coins is the founder's act of cutting flesh. Compared with waiting for liquidation to cause AAVE's bad debts, willing to cut flesh is considered a responsible behavior.

Chen Mo:

**OTC is currently the best solution, and in this way, it is possible to solve all of Curve's debt problems. **However, regarding the specific implementation details of the so-called moral lock-up and price setting, the current information comes from various informal channels, and the specific plan has yet to be officially clarified.

There is nothing wrong with the Curve protocol itself, it's just that the security measures are not adequate. There is demand in the market willing to buy CRV at a price of 0.4, because Curve's role in the DeFi ecosystem is not easily replaced. Even if its AMM model can be replicated, it will take time to build up its ecology and reputation.

If Curve does not solve the problem through OTC, for example, Michael does not choose this step, it may trigger a series of liquidations, which will not only affect Curve, but also other agreements such as FRAX and AAVE. Therefore, current OTC solutions are the best to prevent this chain reaction from happening.

DeFi Cheetah：

Michael opts for an OTC solution to settle his debt, which is a much better move than forced liquidation. In addition, the Curve team, including Michael, is considered the most financially intelligent group of people in the DeFi circle.

The complexity of Curve lies not only in its AMM model, but also in the way it interacts with protocols like Frax lend. Frax lend has a special interest rate mechanism: After a certain utilization rate, the interest rate will double according to a certain half life strategy, forcing borrowers to repay the debt.

The way Michael solves Frax lend is by reducing utilization. However, therein lies a challenge: how to achieve this at the lowest possible cost. He needed to find a way to get Frax borrowers paid back without letting utilization go back to 100 percent right away, so rates couldn't be lowered.

To this end, he also introduced a new strategy to create a new pool and use his own CRV as collateral to attract people who are willing to take risks to buy the stablecoin crvUSD issued by him. In this way, the Frax borrower can get rewarded through this secondary market without waiting for him to repay the debt. **This strategy demonstrates Michael's in-depth understanding of complex financial operations and also helps to reduce the pressure on the entire system. **

**Q3: Is it possible that Michael's position will be liquidated? How will it affect the price of $CRV? **

DeFi Cheetah：

I think the currency price must be related to TVL. Although FRAX and some other cooperation agreements will return part of the funds after the code problem is solved, causing TVL to rebound, it will take time and trust rebuilding to return to the previous level, unless it suddenly enters a bull market. A lot of money is pouring in.

In the interim, there may be other protocols trying to join Ethereum, taking a spot from the lost TVL. I think some agreements can grab a market share of one or two million. As for the currency price, unless the market falls due to macroeconomic factors, Curve’s currency price will not fluctuate too much. I expect a recession is imminent, which will have an adverse effect on the cryptosphere and may cause the price of CRV to drop.

BujiDAO Little Raccoon:

Regarding the currency price of CRV, I think that although there may be fewer people selling it, it is also difficult to find people who are willing to buy and hold it for a long time. What determines the price trend of the currency is the ratio of funds between buyers and sellers. Although the price drop may attract some buyers, it will be difficult to find new investors who are ready to hold for a long time and do not have a large US dollar position.

On the other hand, for investors who have already held CRV and persisted in the bear market, because of their trust in Curve, they may not panic sell due to price fluctuations. Therefore, I think the current price of CRV may remain in this range.

Chen Mo:

OTC may introduce new investors, and the price of CRV has little fluctuation and is mainly affected by the market environment.

Investors who are deeply involved in Curve will hold CRV for a long time, while traders will operate according to market conditions until a new support trend appears in the market.

Opinion Supplement

DODO co-founder radar:

Although Curve is a competitor, I don't want its crisis to continue to evolve, because Curv carries a huge TVL, and its storage capacity reflects the lack of income sources in the DEFI world. If Curve collapses, a large amount of funds will be homeless. ecologically significant impact.

Participants in the Crypto circle mainly seek profit. If there is a lack of important sources of income, it may lead to the loss of users, or even switch to CEFI. This will be a problem for the DEFI ecosystem, and there is no other platform that can replace it for the time being.

On the other hand, if Curve really collapses, it will definitely cause a big shock in the short term, but in the long run, it will make room for other income assets such as LSD, RWA, etc. If people can get income in their own currency, they are not willing Choose projects that favor Ponzi returns.

We have seen many projects attempt to spill high yields into other asset classes. Just like in the fiat currency world, if the interest rate of a certain asset is high, this high yield will naturally flow elsewhere. So **if Curve does collapse, we should bet on other types of yielding assets that have the potential to fill the niches that Curve vacated. **

BujiDAO Little Raccoon:

Critics argue that exposing debt on-chain is vulnerable to sniping, however, if this is a concern, lending should not be done on-chain. It's not that the debt disclosure is problematic, but that he should have avoided too obvious an attack surface.

This point of view is similar to Solana's situation. Part of the code that is not open source is considered more secure, but in fact, hackers can still obtain the code through decompilation, and for white hat hackers, the code that is not open source is more difficult to review. Therefore, it cannot be said that the government will be targeted because the debt is public. When the debt is not public, once it encounters a hacker attack, it may lead to greater panic and danger. **

Mr. Block:

In the DeFi environment, many liquidity providers may want to issue their own stablecoins or tokens, and building their own liquidity pools and continuing to obtain high annualized returns is their main requirement. For example, the success of FRAX is that they bought a large amount of CRV tokens when Curve was low, and used the voting rights of these tokens to create and expand their own FRAX pool.

For DeFi projects, having CRV voting rights is crucial, as it will help them achieve their goals, such as building and expanding their own liquidity pools. Therefore, the motivation for people to buy CRV may be more for their voting rights and future plans, rather than simple short-term gains or currency price trends.

When a DeFi project buys and holds CRV, it is more like a commercial investment, just like renting a place in a shopping mall to open a store. It may become bigger or lose money, but in general, there is an opportunity to do big. This model also reflects the diversity of token economic models, and no project has fully achieved this yet.

**For DeFi projects, holding CRV is not only for financial returns, but also for the purpose of establishing long-term and shared value in the Curve ecosystem. ** For example, the relationship between Convex and Curve is a good example, Convex needs Curve to survive, and Curve needs Convex to bring it a lot of users and liquidity.

Using CRV voting rights to participate in the bribery market can be an important strategy for DeFi projects. The voting rights they gain through bribes allow their projects to grow on Curve, attract more liquidity, and further grow their businesses. Therefore, buying CRV and locking it up for voting rights may be the long-term strategy they pursue.

With regard to moral lockups, most of the moral lockers are institutions and specific individuals who are engaged in projects. Among them, the participation of large institutions brings greater confidence to the market, because they are unlikely to sell in the short term. However, in the cryptocurrency market, it is impossible to predict whether there will be a large-scale sell-off. However, where there is a contract, legal constraints exist, and violations of the rules can have consequences for future transactions.

Conclusion

Curve encountered a crisis caused by Vyper compiler problems, the price of the currency fell and the community panicked. This warns that project security audits need to go further into the language layer.

The founder of Curve chose to solve the debt problem and reduce the utilization rate through the OTC scheme and the creation of a new pool to avoid serial liquidation. This operation reflects its in-depth understanding of complex financial operations and a responsible attitude, which helps ease the entire system pressure.

The currency price fluctuation of CRV is affected by the market environment and investor behavior. Restoring TVL requires time and rebuilding trust. Although there may be new agreements to seize market share, CRV price fluctuations will not be too large, and are mainly affected by macroeconomics and investment. impact on trust.