The Curve turmoil has a comma, how will it affect the development of itself and the industry?

Author: Jiang Haibo, PANews

Curve suffered a loss of more than $50 million due to a vulnerability in the Vyper compiler of the smart contract programming language. Because founder Michael Egorov mortgaged CRV tokens on multiple lending agreements to lend stablecoins, he was almost liquidated under the influence of negative news. However, there is not so much liquidity in the market including centralized exchanges. In the end, Michael sold CRV tokens at a price of 0.4 US dollars (more than 20% lower than the market price) to several investors via OTC. Well-known people in the industry have temporarily come to an end.

However, this incident has caused a certain degree of impact on Curve and even the entire DeFi ecosystem. PANews will briefly analyze some of the impact of this incident below.

has a negative impact on Curve, but Curve still has a leading position in this track

While this incident is not Curve's fault, it's just that Curve happened to be using a specific version of the Vyper compiler that happened to be vulnerable. The attack that Curve faces is also a one-time attack, which can be avoided after modification. But inevitably, the incident made some people lose faith in Curve.

According to data from DeFiLlama, in the past 7 days, Curve’s TVL (that is, liquidity in Curve) has dropped by 27.77%, while Uniswap’s TVL has only dropped by 3.1% during the same period. Curve's TVL nearly halved on Aug. 1 from $3.266 billion before the July 30 crash, before recovering on Aug. 4.

From historical data, many accidents in the industry have seriously affected Curve's data, such as MIM unanchor, UST unanchor, stETH unanchor, FTX crash, and none of them were the cause of Curve, and TVL did not pick up after the accident. Part of the reason is that the market is in a downward cycle, but there are also Curve’s own reasons. For example, from the collapse of FTX to the present, mainstream currencies such as BTC have exceeded the price at that time, but Curve’s TVL has not yet recovered.

Curve's main product function, StableSwap (stable currency exchange), is an extremely introverted track. Centralized exchanges such as Binance and DEXs such as DODO waive transaction fees for major stablecoins. At present, in the direction of on-chain stable currency transactions, Uniswap is almost equal to Curve. In addition, Uniswap occupies a dominant position in the wider track of non-stable currency transactions.

Curve is also doing better on StableSwap in a broad sense, such as wstETH and other LSD (Liquid Staking Derivatives), FRAX and other stablecoins, there will be better liquidity on Curve. New stablecoins and LSD track projects generally give priority to using Curve to provide liquidity and perform liquidity incentives. Due to Curve's token voting governance mechanism, projects such as Frax have accumulated a lot of Curve's voting rights, and are deeply bound to Curve's interests. For a period of time, Curve will still be the leader of the StableSwap track. And some projects that also focus on the StableSwap track have almost returned to zero, such as Saddle Finance and Swerve, as well as some forked projects on non-Ethereum chains.

The attacker is actively repaying the loan, whether the compensation is undetermined

One of the reasons champion projects are more attractive for funding is that they are more likely to pay compensation if an accident occurs.

Although not Curve's fault, the loss did happen to Curve, and it hurt some users who trusted Curve. There are discussions about compensation in Discord, but there is no clear official statement at present.

If compensation is made, a part of CRV tokens or DAO’s handling fee in Curve may be used, which may cause short-term adverse effects on CRV holders. If no compensation is made, it may affect Curve’s liquidity. Some users may have provided liquidity in multiple pools, and some of them will suffer losses. Such groups may redeem liquidity because they do not pay compensation.

The most ideal ending is that the hacker repays all the loans, or most of them, and the remaining small part can be compensated by Curve or related projects. For CRV holders, the rights and interests will not be greatly reduced; for users who suffer losses, funds can also be recovered to restore confidence. It is indeed developing along this route at present, and projects such as Alchemix have recovered some funds after trying to communicate with the hackers.

DeFi yield is no longer attractive, there is no 100% security

Early DeFi users are like "explorers of the New World", need to take greater risks, and may also obtain excess returns for discovering the New World. But today, the risks and rewards that need to be taken seem to no longer be equal.

Take Curve 3pool (DAI/USDC/USDT) on Ethereum as an example. The liquidity of this pool is 230 million US dollars, the daily transaction volume is 62.58 million US dollars, the transaction fee ratio is 0.01%, and the liquidity provider gets 50 % of transaction fees, DAO gets the remaining 50%. For liquidity providers, the APY generated by transaction fees is only 0.59%. In addition, according to the amount of CRV pledged, there will be CRV token incentives with APY ranging from 0.91% to 2.29%. In other words, if CRV tokens are not pledged, the total APY of liquidity providers is only 1.5%. Even if you pledge as much CRV as possible or use a revenue aggregator such as Convex, the APY you can get does not exceed 3%.

Curve is also a DeFi project that has been running stably for many years, and was considered one of the safest DeFi projects before that. Although the attack this time was a one-off and the vulnerability was not due to Curve itself, the incident will also make people realize that even the most secure DeFi projects are not 100% safe. This incident may have an impact on the entry of new DeFi users, but has less impact on experienced users.

In contrast, with the interest rate increase in the United States, the yield of traditional financial markets has risen. As of August 4, the yield of the three-month short-term bond issued by the US government was 5.443%, which is generally considered to be a risk-free return. Rate. The low returns and relatively higher risks of DeFi may prompt some investors to exchange their mining funds in DeFi for U.S. Treasury bonds. However, as of August 4, the issuance of the main stablecoin USDT has not seen a significant decline.

So, will this be good for RWA (Real World Asset) projects? There might be a slight benefit. But this direction is not completely decentralized, and there may be single points of failure and regulatory issues.

The tokens sold by OTC rely on moral lock-ups to become clear selling pressure

Prior to this, Michael held too much CRV and was criticized by many people. Although the sale of CRV tokens through OTC this time will accelerate the decentralization of CRV, it may also pave the way for future problems.

The OTC transaction price of CRV this time is $0.4, which is about 30% lower than the current market price. Some of the buyers are Curve-related projects such as Yearn Finance, etc., which need to accumulate a large amount of CRV for long-term pledges. This part of the buyers sells CRV little will.

The other part is investors in the industry. Although there is a half-year lock-up period, the tokens given to investors are completely unlocked, that is, relying on "moral lock-up". From the data on the chain, it can be seen that some investors have locked the received CRV tokens in Curve for half a year. Considering credibility issues, there may be no or only a few investors who will sell CRV before the agreed date.

However, this part of tokens may still have an impact on the price of CRV. Although the spot will not be sold immediately, some investors may hedge through the perpetual contract of the centralized exchange. From the accident to August 4, the currency The funding rate of the CRV/USDT perpetual contract trading pair continues to be negative, that is, the bearish sentiment dominates.

In addition, Michael is still selling CRV on the chain to exchange for stable currency to repay debts, causing selling pressure. Since the main purpose of many liquidity providers in Curve is to obtain income, a lower CRV price may also lead to a reduction in liquidity and have a negative impact.