Golden Finance reporter Jessy

Recently, Curve CEO’s behavior of pledging CRV to cash out has been frequently questioned.

The cause of the incident is that SEC regulation has caused the crypto market to fall into a continuous low liquidity, and the price of CRV has continued to fall, falling by more than 23% in a week. Previously, Curve's founder Michael Egorov was exposed to have used 288 million CRV tokens (this CRV accounts for about 33% of the CRV in circulation) as collateral to borrow about $63 million in USDT on Aave. It seems that in order to avoid the risk of liquidation of this stablecoin loan, after CRV fell sharply by more than 17% last Saturday, Michael Egorov deposited 38 million CRV in the decentralized lending platform Aave to stabilize the price of CRV.

DefiLlama data shows that in the CRV market of Aave v2, if the price of CRV drops to US$0.372, 288.8 million CRV in this lending behavior will face liquidation risk. However, under the strong support of Michael Egorov, its health factor has recovered to 1.72 on June 19.

In fact, Michael Egorov pledged 288 million CRV on AAVE, which he used to pledge part of the CRV on the lending protocol to borrow stablecoins. According to on-chain data, Michael Egorov has CRV mortgage loans on four lending protocols including Aave. Currently, Michael Egorov has pledged a total of $269 million in CRV and lent out $100.3 million in stablecoins.

Users left many questions: Why does Michael Egorov hold so much CRV? What did he use the stablecoins he borrowed for? What impact will the founder's large-scale cash-out behavior have on the protocol? Should his behavior be regulated and how?

Crazy big loans

According to on-chain data, as of press time on June 19, Michael Egorov’s known positions in various DeFi protocols are as follows:

Pledged nearly 177 million USD CRV on Aave and borrowed 60.48 million USDT (part of this loan has been repaid in the past few days. The earliest pledged amount was 288 million CRV, and now it is 285 million);

Pledged $49.76 million CRV in Abracadabra and borrowed $20.45 million MIM;

Pledge $27.94 million of CRV on Fraxlend and borrow approximately $12.71 million of FRAX;

Mortgage $14.72 million CRV at Inverse Finance and borrow 6.66 million DOLA.

At present, he has pledged a total of $269 million in CRV and lent out $100.3 million in stablecoins. The total amount of CRV pledged and lent is 433 million, while the total circulation of CRV is about 853 million. In other words, Michael Egorov once held more than 50% of the CRV in circulation.

In the initial token distribution mechanism, CRV will allocate 62% of tokens to liquidity providers and 30% to shareholders (team and investors). Michael Egorov also obtained a large amount of CRV by providing liquidity in the early stage and as a team founder. Currently, Michael Egorov still receives a large amount of staking rewards in his wallet every day.

These large amounts of collateral, as market liquidity declined and CRV plummeted, triggered panic about the coming of liquidation. Liquidation itself is not scary, but the chain reaction brought about by liquidation is scary. In Defi lending, because the price of virtual currency fluctuates greatly, it is generally borrowed by over-collateralizing another virtual currency. When the collateralized virtual currency falls sharply, the borrower actually has no motivation to repay the loan (because the price of the other virtual currency, especially the stablecoin, is higher than the loan collateral asset). At this time, for the pool, there is a bad debt. Just like traditional finance, it is necessary to auction the collateral assets to offset the debt. In Defi, the liquidator buys these collateralized assets.

Liquidation on DeFi is based on market price. It can be understood that once the liquidation line is reached, these collateral assets will be sold at the market price, and the price of CRV will fall further. When market liquidity is poor, it will cause investors to panic sell.

For example, Curve founder Michael Egorov used CRV, which accounts for 33% of the market's circulating supply, to borrow USDT on Aave, the largest single loan. According to DefiLlama data, in the Aave v2 CRV market, if the CRV price drops to $0.372, this 285 million CRV large mortgage loan will face liquidation risk. The current health coefficient of this loan is 1.7.

If it is really liquidated, the huge selling pressure of the funds may cause panic among people, and they will sell CRV. In order to deal with the run on the funds in the pool caused by such selling, what Michael Egorov is doing now is to deposit more CRV to increase the excess collateral ratio of CRV. For example, after CRV fell sharply by more than 17% last Saturday, Michael Egorov deposited 38 million CRV into the decentralized lending platform Aave to stabilize the price of CRV.

According to on-chain analysis, Michael Egorov has been active in the lending market in recent days. He used his CRV to borrow money from everywhere and then repaid it to Aave to prevent liquidation on the largest platform. The following figure shows part of Michael Egorov's loan repayment operations on June 17. Within four minutes, Michael Egorov first withdrew a certain amount of CRV from Aave V2, then deposited this CRV through Inverse to borrow a certain amount of DOLA, and then converted DOLA into USDT through Curve's currency exchange mechanism. Finally, he returned USDT to Aave v2. After such a set of operations, it seems that part of the USDT has been repaid to Aave v2. But in fact, he is still taking out loans with CRV. Perhaps it is precisely because public opinion is staring at Michael Egorov's largest loan on the Aave platform that Michael Egorov is repaying the "urgent small amount".

The founder was sued for cashing out and failing to fulfill his promise to investors

What did Michael Egorov do with the borrowed stablecoins? According to Lookonchain’s analysis, Egorov sent $37.7 million worth of USDT to the cryptocurrency exchange Bitfinex, and $51 million worth of USDC to the market maker agreement Wintermute Trading.

According to Australian Financial Review, Michael Egorov and his wife Anna Egorova recently spent $41 million to buy the Melbourne mansion Avon Court, setting a record for the highest real estate transaction in Victoria this year. In addition, in March last year, the couple also bought a two-story, five-bedroom Italian mansion for $18.25 million.

The Victorian mansion, called Avon Court, covers an area of ​​4251 square meters and has a total of nine bedrooms, seven bathrooms, a gym, a steam room, two swimming pools, a playground, a mini football field, a basement garage with parking spaces for 10 cars and six kitchens.

Founder Michael Egorov relied on large amounts of CRV to lend stablecoins while selling large amounts of USDT, which is difficult to get rid of the suspicion of cashing out. In the traditional financial market, if you want to use stock mortgage loans in the United States, first of all, the company itself needs to have a certain stable trading volume in the market, and the lending institution must ensure that the mortgaged stocks have sufficient circulation to be converted into cash to repay the debt. When the value of the mortgaged stocks falls by a certain amount (usually 30%), the borrower needs to increase the number of mortgaged stocks to make up for the difference.

In the stock market, the behavior of large shareholders pledging stocks for loans will cause great panic in the market in a bear market, and the stock price will be hit hard. The panic selling of the public will further reduce the value of the mortgage, and a series of chain reactions will occur. Therefore, the mortgage behavior of large shareholders is required to be disclosed in a timely and proactive manner to allow shareholders to make decisions.

In Defi, is it possible to regulate similar behaviors? Compared with traditional finance, Defi has a relatively small impact on the entire ecosystem due to the transparency of the chain and a series of mechanisms written into code.

DeFi risk manager Gauntlett has suggested to the Aave governance community to freeze the CRV tokens in the loan positions of Michael Egorov’s wallet address. Gauntlet said it checked the risk profile of the wallet in question, which relies heavily on CRV tokens as collateral.

Whether such a suggestion will be adopted is a great test of the community governance ability. Even if it is adopted, how much deterrence will it have for Michael Egorov? If similar situations occur, if the chain and community governance seem to be unable to avoid and solve the problem of Michael Egorov's large cash withdrawal. Michael Egorov's behavior hurt people's simple emotions. People think that as a founder, he should not be so large in mortgage cash withdrawal, and he should be fully dedicated and responsible for the project. However, as a founder, if he completely used the mechanism set by Defi to obtain a large amount of CRV, it is actually understandable.

However, offline laws can still regulate Michael Egorov’s illegal behavior in the real world. Currently, Michael Egorov himself is being jointly sued by three well-known crypto venture capital companies, ParaFi, Framework Ventures, and 1kx, in the real world, accusing Michael Egorov of engaging in fraud and misappropriating trade secrets, causing them significant economic losses.

They allege that Michael Egorov enriched himself through fraud, deposited the plaintiffs’ funds into Curve’s liquidity pool, received CRV tokens and fees as a reward for providing liquidity, and sold millions of dollars worth of CRV tokens (which the plaintiffs argue belong to them). The three VCs say they did not receive the promised Swiss Stake equity, that their nearly $1 million in funds were never returned, and that they never received the tens of millions of dollars worth of CRV they claim to be entitled to.

In other words, if it is true, the returns he promised to investors as a liquidity provider in the early days were not fulfilled, so part of the CRV in his hands was not obtained legally.

Michael Egorov was the co-founder and CTO of NuCypher before founding Curve, and earlier worked on event infrastructure at LinkedIn. With a background as a physicist, he has worked in fields closely related to quantum computing and cryptography. In addition, he is a bronze medalist in the 2003 International Physics Olympiad and graduated from the Moscow Research Institute of Technology.