Curve turbulence puts a comma on it. What is the impact on its own and the development of the industry?

Author: Jiang Haibo, LianGuaiNews

The Curve protocol suffered a loss of over $50 million due to a vulnerability in the Vyper compiler, the smart contract programming language. Due to founder Michael Egorov’s use of CRV tokens as collateral for borrowing stablecoins in multiple lending protocols, the protocol was at risk of liquidation due to the negative impact of the news. The market, including centralized exchanges, did not have as much liquidity. Eventually, Michael temporarily resolved the situation by selling CRV tokens at a price of $0.4 (over 20% below market price) to several well-known industry insiders through an over-the-counter (OTC) transaction.

However, this incident has had a certain impact on Curve and even the entire DeFi ecosystem. LianGuaiNews will briefly analyze some of the effects of this event below.

Negative Impact on Curve, But Curve Still Dominates in This Race

Although this incident was not Curve’s fault, it just happened that Curve used specific versions of the Vyper compiler that had vulnerabilities. The attack on Curve was a one-time event and can be avoided after being fixed. However, it is inevitable that some people have lost confidence in Curve as a result of this incident.

According to data from DeFiLlama, in the past 7 days, Curve’s Total Value Locked (TVL), which represents liquidity in Curve, has decreased by 27.77%, while Uniswap’s TVL has only decreased by 3.1% during the same period. Compared to the $3.266 billion before the incident on July 30, Curve’s TVL almost halved on August 1 and then partially recovered on August 4.

Looking at historical data, multiple incidents in the industry have had a serious impact on Curve’s data, such as MIM detachment, UST detachment, stETH detachment, and FTX crash, none of which were caused by Curve. After these incidents, the TVL did not recover. Some of the reasons are that the market is in a downward cycle, but there are also reasons specific to Curve. For example, since the FTX crash, the prices of mainstream coins like BTC have exceeded the prices at that time, but Curve’s TVL has not been able to recover.

Curve’s main product, StableSwap, is an extremely competitive field. Centralized exchanges like Binance and DEXs like DODO waive transaction fees for major stablecoin trading. Currently, in the on-chain stablecoin trading direction, Uniswap is almost on par with Curve. In addition, Uniswap dominates the broader field of non-stablecoin trading.

Curve also performs better in the broader StableSwap field, such as with LSDs (liquidity staking derivatives) like wstETH and stablecoins like FRAX, where Curve provides better liquidity. New stablecoin and LSD projects in the field typically prioritize using Curve for liquidity and liquidity incentives. Due to Curve’s token voting governance mechanism, projects like Frax have accumulated a significant voting power in Curve and have a deep connection with Curve’s interests. For a period of time, Curve will still be the leader in the StableSwap field. Many projects that focus on the StableSwap field have almost gone to zero, such as Saddle Finance and Swerve, as well as some fork projects on non-Ethereum chains.

Attacker’s Repayment Initiative, Compensation Undetermined

One of the reasons why flagship projects are more attractive to capital is that even in the event of accidents, such projects are more likely to provide compensation.

Although it is not Curve’s fault, the loss did occur on Curve, and some users who trusted Curve were harmed. There have been discussions about compensation in Discord, but there is currently no clear official statement.

If compensation is to be made, it may be in the form of a portion of CRV tokens or the fees belonging to the DAO in Curve. This may have a short-term negative impact on CRV holders. If no compensation is provided, it may also affect Curve’s liquidity. Some users may have provided liquidity in multiple pools, and a portion of them suffered losses. This group may redeem their liquidity due to lack of compensation.

The ideal outcome would be for the hacker to repay all or the majority of the funds, with the remaining small portion being compensated by Curve or related projects. For CRV holders, their rights will not be significantly reduced, and for users who have suffered losses, they can recover their funds and restore confidence. Currently, this is indeed the direction of development, as projects like Alchemix have already recovered some funds after attempting to communicate with the hacker.

DeFi Yield is No Longer Tempting, There is No 100% Security

Early DeFi users were like “explorers of a new continent,” taking on greater risks and potentially earning excess profits by discovering new opportunities. However, now the risks and rewards seem to no longer be balanced.

Take the Curve 3pool (DAI/USDC/USDT) on Ethereum as an example. The liquidity of this pool is $230 million, with a daily trading volume of $62.58 million. The transaction fee ratio is 0.01%, with liquidity providers receiving 50% of the transaction fees, and the DAO receiving the remaining 50%. For liquidity providers, the APY generated solely from transaction fees is only 0.59%. In addition, depending on the amount of CRV tokens staked, there is an APY incentive of 0.91% to 2.29% for CRV tokens. This means that if no CRV tokens are staked, the overall APY for liquidity providers is only 1.5%. Even if you stake as many CRV tokens as possible or use yield aggregators like Convex, the maximum APY attainable is still less than 3%.

Curve is also a DeFi project that has been running stable for many years and was previously considered one of the safest DeFi projects. Although the attack it suffered this time was one-time and the vulnerability was not caused by Curve itself, this incident also makes people realize that even the currently safest DeFi projects are not 100% secure. This incident may have an impact on the entry of new users into DeFi, while its impact on experienced users is relatively small.

On the other hand, with the increase in interest rates in the United States, the yield of traditional financial markets has risen. As of August 4th, the yield of 3-month short-term bonds issued by the US government is 5.443%, which is generally considered risk-free yield. The low yield of DeFi and its relatively higher risks may prompt some investors to convert their mining funds in DeFi into US government bonds. However, as of August 4th, the issuance of the major stablecoin USDT has not shown a significant decrease.

So, would this be a positive development for the RWA (Real World Assets) project? Perhaps there would be a slight benefit. However, this direction is not completely decentralized and may have single point of failure and regulatory issues.

Tokens sold OTC rely on moral lock-up to put downward pressure

Before this, Michael was criticized for holding too much CRV. Although the sale of CRV tokens through OTC may accelerate the decentralization of CRV, it may also sow the seeds of future problems.

The OTC trading price for CRV this time is $0.4, which is about 30% lower than the current market price. Some of the buyers are related projects such as Yearn Finance, which need to accumulate a large amount of CRV for long-term staking. These buyers are not willing to sell CRV.

Another part consists of investors in the industry. Although there is a lock-up period of six months, the tokens given to investors are fully unlocked, relying on “moral lock-up”. From on-chain data, it can be seen that some investors have locked up the received CRV tokens in Curve for half a year. Considering reputation issues, there may be no or only a few investors who will sell CRV before the agreed date.

However, this part of the tokens may still have an impact on the price of CRV. Although spot trading will not be immediately sold, some investors may hedge through perpetual contracts on centralized exchanges. From the occurrence of the incident to August 4th, the funding rate of the Binance CRV/USDT perpetual contract trading pair has remained negative, indicating a bearish sentiment.

In addition, Michael is still selling CRV on-chain to repay debts with stablecoins, causing downward pressure. Since the main purpose of many liquidity providers in Curve is to earn profits, a lower CRV price may also lead to a decrease in liquidity, causing negative impact.

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