Opinion: Curve Finance may face another stress test in February

Author: Tom Blackstone, Cointelegraph; Compiler: Songxue, Golden Finance

According to a January 8 report by anonymous cryptocurrency investment analyst and X user DeFi Made, theCurve Finance protocol Core systemic risks have not been fully resolved and the agreement will face "another stress test" in February.

According to the report,a large number of Curve (CRV) tokens will become tradable in the coming weeks, and the sale of these tokens may lead to "the same situation as what happened in August." Something like this”, the price of the CRV token could collapse. However, DeFi Made Here also warned that this scenario is only a possibility.

DeFi Made Here is an analyst at cryptocurrency investment fund Alphabeth Capital and an advisor to Web3 developer Good Entry Labs, according to their X profile.

As of August 1, Curve Finance founder Michael Egorov owed $100 million in debt to various decentralized finance (DeFi) protocols, according to cryptocurrency research firm Delphi Digital. This debt is backed by the CRV token, and critics point to the risks it poses to the Curve protocol and the DeFi system as a whole. However, when Curve was tapped for $62 million in August, Egorov paid down some of the debt and the agreement appeared to weather the storm. At the time of the attack, the CRV token price was around $0.63. The price has since fallen to $0.55, a drop of 12.7%, according to CoinMarketCap.

DeFi Made Here stated in their report that the market calm may have masked potential weaknesses in the Curve protocol. “$CRV is a ticking time bomb,” the analyst said. Its ecosystem "is in the hands of 'questionable persons/entities,' and Mich's ability to service its debt, which is growing by $1.7 million per month, [is made more difficult]."

The analyst claims , Egorov was "close to liquidation" in August but knew he "would not be able to fulfill his public commitment to repay the debt if necessary." In response to this threat, Egorov decided to sell some of his CRV tokens to investors via over-the-counter (OTC) transactions and use the cash to pay off the debt. However, this strategy wouldn’t work if the investors who bought the tokens dumped them on the market, so Yegorov insisted on a “handshake agreement” that they wouldn’t sell until February 2024. “$231 million of CRV sold for $0.40 for $92 million and there was a handshake agreement not to sell OTC CRV until February 2024.”

Counterparties to the transaction include market makers Wintermute and DW Labs, Tron network developer Justin Sun, Web3 developer Jeffrey Huang (known as "Machi Big Brother") and other cryptocurrency investors .

Confidence in Curve was restored after Egorov successfully raised cash to repay the loan. However, DeFi Made Here claims that Egorov originated $75 million in new loans when the Silo Llama protocol launched in October. Silo Llama uses Curve’s stablecoin crvUSD as collateral. Analysts said about $45 million of that was borrowed from it, with the remainder obtained from Fraxlend and other protocols.

One of the largest liquidity providers for these loans is DeFi developer Michael Patryn (known as “0xSifu”), the report said. Patryn is also “shorting” CRV and may begin “drawing liquidity from the pool and shorting more CRV” when OTC tokens become available for trading in February. This could once again plunge the Curve protocol into crisis, leading to concerns about Egorov’s loan liquidation and the knock-on effects across the Curve ecosystem. The agreement will therefore face another upcoming "stress test", as analysts claim:

"Curve will have to pass another stress test in the coming weeks, when OTCed CRV will become liquid. Unfortunately, founder debt puts a lot of pressure on the health of the entire Curve ecosystem and is a systemic risk."

However, DeFi Made Here also claims that this scenario is just a possibility. Patryn may be a "good actor". In this case, "he will only pay down the CRV debt and continue to provide liquidity to [Egorov], and the OTC buyers will not do anything similar." The analyst expressed hope that this optimistic scenario will be realized, And "the upcoming events will not harm Curve, and CRV design restrictions will allow the ecosystem to be maintained."

Curve is currently the 17th largest DeFi protocol, according to data from blockchain analytics platform DeFiLlama. It has more than $1.6 billion worth of crypto assets locked in its contracts.