This week, the Curve attack incident has caused quite a stir. The programming language-level vulnerabilities are no longer the focus, but the massive liquidation faced by the founder has made the market anxious, fearing a complete collapse of DeFi. Although it is a relatively independent event, the FUD surrounding CRV reflects the long-standing problems that have plagued DeFi. On closer examination, behind this exploit is the liquidity dilemma that Curve has been facing, the difficulty of improving the yield of DeFi, and the game that the Curve founder has been engaging in for months.

"The Battlefield of Bulls and Bears": Timeline of CRV

In fact, this is not the first time that CRV has been the target of FUD. Since the end of last year, CRV has become the main battleground for the confrontation between the bulls and bears. Over the past half year or so, Curve and its founder have always appeared in our sight in various "peculiar" ways.

November 2022: "DeFi Defense War"

In late November 2022, "on-chain bear" ponzishorter.eth (hereinafter referred to as ponzishorter) targeted Curve, attempting to short its token CRV. Not long ago, Mango Market, which was also attacked by him, lost nearly $100 million. Therefore, the confrontation with the shorting forces against CRV is called the "DeFi Defense War" by veteran DeFi players.

Starting from November 13, ponzishorter seized the opportunity of founder's "collateral cash-out" and decided to take immediate action. He then deposited around 40 million USDC into Aave and borrowed a large amount of CRV for selling. Among these borrowed CRV tokens, most of them were collateralized by Curve founder Michael Egorov in order to borrow stablecoins.

In the afternoon of November 22, ponzishorter decided to launch a total attack and gradually borrowed over 80 million CRV from Aave to sell. Retail investors noticed the price fluctuations and gathered together to short sell. Curve founder Michael also added 20 million CRV to Aave to ensure that his position would not be liquidated. With the continuous buying on the spot market and tokens being continuously borrowed from the lending pool, CRV liquidity plummeted and the price rose from around $0.4 to around $0.6.

About 9 p.m., CRV rose above $0.63, and ponzishorter faced liquidation. In the end, its position of over $60 million was completely liquidated, leaving approximately $1.7 million bad debt on the Aave platform. The next day, Curve released its stablecoin "crvUSD" code and whitepaper, and the CRV price surged from $0.6 to $0.74, marking the complete failure of the "DeFi defense war" by the bears.

May-June 2023: Buying Mansions, Fraud Scandal, and "Loan Cash-Out"

On May 28th, according to the Australian Financial Review, Curve founder Michael Egorov and his wife Anna Egorova spent $41 million to buy the luxurious Avon Court mansion in Melbourne, setting a record for the highest transaction in Victoria, Australia this year. In addition, they were also revealed to have bought a two-story five-bedroom Italian-style mansion for $18.25 million in March of last year. The community was in an uproar.

Egorov's Avon Court mansion in Melbourne

Then, in early June, well-known VCs ParaFi, Framework Ventures, and 1kx filed a lawsuit against Egorov, accusing him of fraud and misappropriation of trade secrets. The three VCs claimed that Egorov deceived them into using funds for recruiting developers, lawyers, and other staff, but actually used the funds to gain control of Curve governance. Egorov's defense team responded to the allegations as "clever rhetoric."

ParaFi, Framework Ventures, and 1kx file lawsuit against Egorov

At the end of the month, it was discovered that Egorov had once again deposited approximately 38 million CRV into Aave. Due to the continued price decline, Egorov must provide more collateral to reduce their liquidation risk. As of now, Egorov has deposited approximately $180 million worth of CRV into Aave, totaling 277 million tokens, and borrowed 64.23 million USDT, with a loan-to-value ratio of 1.68.

According to CoinGecko's data, which shows a circulating supply of over 850 million tokens, the founder of Curve controls roughly one-third of the circulating supply of CRV. Many people interpret Egorov's borrowing behavior as a "cash-out" action in the context of insufficient market liquidity. However, there are also voices that suggest this may be a form of "short-selling" behavior.

dForce founder mindao believes Egorov's "collateral cash-out" is a form of short-selling

July-August 2023: "Second Defense War"

In the past few days, the industry has once again started discussing the possibility of a DeFi market meltdown. On July 31, the official Twitter account of the Ethereum EVM compiler Vyper tweeted that certain versions of Vyper are susceptible to reentrancy bugs, and any projects that depend on these versions should contact the team immediately. Subsequently, Curve team tweeted that some stablecoin pools have been attacked.

According to Paduan monitoring, Curve lost about $52 million in just a few hours. As a result of the incident, Curve's TVL dropped from $3.2 billion to $2.4 billion, and the price of CRV quickly fell below $0.6. According to dexscreener, the instant price of CRV reached near zero in the early morning. Soon, the focus shifted to the founder of Curve. Due to the price drop, Egorov's on-chain CRV collateral borrowing health rate started to decline, and he transferred another 16 million CRV to Aave.

At noon, Wu Jihan, the co-founder of Bitmain and Matrixport, posted on social media: "In the upcoming wave of RWA, CRV is one of the most important infrastructures. I have bought it at a low price, but this does not constitute financial advice." However, Egorov's lending health situation seems pessimistic, with a loan interest rate of 105% for around $15.8 million in Fraxlend, which will reach 10,000% in 3 days. CRV subsequently fell below $0.5, with a 20% decrease in 24 hours. People started to worry if DeFi is going to die.

Egorov's lending health situation was once close to the liquidation threshold

But the situation soon took a turn. Around 12 o'clock in the evening, Huang Licheng confirmed on social media that he acquired 3.75 million CRV from the Curve founder through OTC and pledged it in the Curve protocol. The next day, Sun Yuchen's relevant address also transferred 2 million USDT to Egorov's address and received 5 million CRV. Rumors began to circulate that the Curve founder was conducting OTC transactions for CRV at an average price of $0.4.

Immediately after that, projects like Yearn Finance, Stake DAO, and institutions and VCs like DWF joined the rescue operation for CRV. According to monitoring, Egorov sold a total of 54.5 million CRV on the same day, bringing back approximately $21.8 million in funds, and the health ratio of his main loan positions all recovered to above 1.6. Subsequently, the price of CRV also rebounded to around $0.6, marking the end of the long and short battle for CRV.

What is really happening in DeFi?

Not only once did he deliberately induce a vacuum, putting the agreement and the entire DeFi at risk. We can't help but wonder, what is Curve's founder thinking? Undeniably, compared to other founders, Egorov does have a "personality". But Curve's dilemma is not unique. Now, the entire DeFi is suffering from the "yield disease".

Replay the game

When it comes to DeFi, we talk the most about decentralization and security. These are indeed important, but whether it is traditional finance or decentralized finance, they cannot do without one core point, which is to make money, especially to make rich people make money. This point is crucial for whales and institutions with millions of dollars in on-chain assets. Allowing these people to make money is the most realistic problem that DeFi faces.

The "Meme Doge" with hundreds of APYs is unreliable. DeFi needs to be able to accommodate at least millions of funds and provide a "big pool" that can generate substantial and stable returns for LPs. For example, in the past, LUNA, with its financial engine Anchor, was able to provide a fixed annual yield of 20% for $18 billion in funds. After LUNA's collapse, the old DeFi protocols became "popular" again. Although the APY is not as high as 20%, it has withstood the test of the market and time. However, the crypto market, after being hit by LUNA, 3AC, and FTX in succession, did not provide much opportunity for these old protocols to make a comeback, especially Curve.

As one of the most important infrastructures in the DeFi stablecoin market, no one doubts the important role Curve plays in the ecosystem. However, in terms of profitability, Curve is indeed showing signs of fatigue. When it comes to stablecoin base earnings, Curve is significantly lagging behind the top five liquidity pools on Aave in terms of returns, especially under the catalyst of intense on-chain long and short battles in the recent period, Aave's base earnings far exceed Curve's. And the main source of income for most of Curve's liquidity pools still comes from CRV emissions.

Yield situation of Curve and Aave's top 5 liquidity pools, data source: DeFi Llama

In an interview with BlockBeats, Smrti Labs founding partner Bowen stated that in the current DeFi field, protocols like Lybra and GMX that can accommodate a certain amount of capital and have substantial yields are preferred by large investors. The eUSD/USDC pool provided by Lybra currently has an APR of 11.3%, while the stablecoin pool on GMX has an average yield of 9.57% over the past 30 days. Both are stablecoins, but for large investors, they will go wherever they can make more money. Therefore, Curve has always faced the problem of decreasing liquidity.

Yield situation of Lybra eUSD and GMX pools, data sources: Lybra Finance, DeFi Llama

With low base returns and poor token performance, how can we improve the returns for LPs? The founder of Curve's idea is to take a gamble in the market and make the price of CRV higher.

Unlike other veteran DeFi projects, Curve does have some unique "advantages" in this regard.

Firstly, due to the incentivized locking mechanism of Curve's veTokens, most CRV tokens are locked, which makes Curve's liquidity much worse than other high-market-cap DeFi tokens. Sometimes, the cost of borrowing CRV on Aave is even lower than directly buying it on exchanges, because the low liquidity causes the buyer to pay a higher premium during the purchase process.

Additionally, as mentioned earlier, Curve's founder controls one-third of the total circulating supply of CRV, which provides the team with many possibilities for manipulating the price, including the method of feigning "rare selling" to induce short-selling.

In terms of results, this approach was very effective in last year's "DeFi Defense War". It not only boosted the token price but also made Curve a focal point of the market again, generating publicity for the upcoming crvUSD. However, in this CRV long-short duel, Curve's founder seemed to have suffered a major loss, as the token price failed to return to its previous level and he was forced to sell a significant portion of his CRV holdings.

However, from another perspective, Evgorov still got the result he wanted, as Bowen put it, "Kidnapping everyone to help CRV lift the sedan." Now, Evgorov's CRV holding ratio has dropped to about 20% of the total circulation, but CRV has gained a group of powerful supporters, including Wu Jihan, Du Jun, Sun Yuchen, and other top players, as well as a group of "institutional friends" like DWF.

Now, everyone has a common interest, and Curve and CRV have a promising future. In this sense, Egorov's gamble is not too bad.

Profit Dilemma: Big Players Can't Make Money in DeFi

After the LUNA scandal, liquidity problems began to spread throughout the entire crypto market. Subsequently, Three Arrows Capital (3AC) collapsed because it couldn't generate target profits due to reduced market activity, leading to large clients withdrawing funds and ultimately collapsing. According to some former internal employees of 3AC who spoke to BlockBeats, there were almost no scenarios that could generate expected returns for the large-scale assets managed by the team in the later stages of the company's operation. The FTX scandal at the end of the year further added to the market's troubles.

Since the US Federal Reserve began its interest rate hike process, liquidity tightening has been eroding various markets worldwide, and cryptocurrencies, which are defined as risk assets, are particularly affected. Despite several scandals, people have been touting the transparency and risk resistance of decentralized finance, but this hasn't stopped the tightening dagger from slowly piercing the heart of DeFi.

US one-year, two-year, and ten-year Treasury yields, data source: FRED

As of now, the yields on US one-year, two-year, and ten-year Treasury bonds are 5.37%, 4.88%, and 3.97%, respectively. Regardless of the yield curve, whether it is short-term or long-term government bonds, the yields have been steadily rising since the end of 2021. Compared to mainstream DeFi protocols like Curve and Aave, even the current yield on ten-year Treasury bonds is significantly higher than their average returns.

On the other hand, the yield level of DeFi has gradually declined. According to DeFi Llama data, the median DeFi yield has dropped from 6% at the beginning of last year to 2% in July this year. For large investors, this is almost unprofitable. "Why take the risk of two or three times multiplier in DeFi for a 3% return when you can get a 5% return on US Treasury bonds?" Bowen explained to BlockBeats.

Changes in median DeFi yield, data source: DeFi Llama

For clients with a large amount of capital, DeFi is no longer as profitable as before. In the past, not to mention a year, you could make a 3% return in just one day. Therefore, keeping funds in DeFi seems to be an unwise choice under the dual constraints of liquidity tightening and regulatory shadow. Bowen believes that most of the funds still in the DeFi market may be inconvenient or even unable to "get onshore". "Other money has already run away."

Since it can't leave, the problem needs to be solved internally. Apart from PoS staking rewards and protocol token emissions, what other ways can provide stable and substantial returns for large investors?

The first thing that comes to mind is Real Yield. Essentially, Real Yield refers to protocols paying users returns based on their actual income, denominated in native tokens like ETH or stablecoins like USDC, to eliminate the inflation and income instability caused by token emissions. GMX, which became popular at the end of last year, is a leading representative of this narrative.

According to Nansen data, by the end of August 2022, the trading volume of GMX surpassed Uniswap and became the protocol with the highest weekly trading volume on the Arbitrum network. In GMX's whitepaper, the team explicitly stated that GLP token holders (i.e. LP) not only receive GMX token rewards but also earn platform fee income denominated in ETH. After the GMX token price surged to $56 in September, the Real Yield narrative became a new hope for saving DeFi.

But in reality, during a bear market, the income generated from so-called "actual agreement income" is not reliable. Soon everyone discovered that, except for protocols like Uniswap and GMX that have strong attraction and can accommodate large amounts of funds, most DeFi protocols cannot generate income during a bear market. In an interview with BlockBeats, Anton Bukov, co-founder of 1inch, revealed that without DeFi aggregator products, most DEXs would not survive during a bear market because these DEXs have no liquidity.

Related reading: "Interview with 1inch: How to innovate in the DEX field under the shadow of Uniswap's monopoly?"

After a brief "spring frenzy" at the beginning of the year, the market entered a deep bear market in April. Apart from the bulk operations of the "MoStudio", on-chain activities have reached a few countable degrees, and the Real Yield narrative quickly died out. However, surprisingly, since June, the tokens of Compound and MakerDAO, two veteran DeFi projects, have started to rise and have reached new highs of the year.

MKR and COMP token price movements, data source: CoinGecko

The market's explanation for the rise is: RWA.

In the crypto market, the concept of Real World Assets (RWA) has been repeatedly hyped in the past few years, and this time it is being used in the DeFi field. Since it is not possible to generate enough income on-chain, can the income from the real world be brought into DeFi? Previously, the founder of MakerDAO published an article proposing the "Endgame" after the Tornado Cash incident, which sparked a discussion about RWAs.

Now there are rumors in the market that MakerDAO has significantly increased its income in the past few months by using treasury funds to purchase US government bonds. And the founder of Compound also announced at the end of June the establishment of his new company, Superstate, which is specifically responsible for bringing assets such as bonds onto the chain and providing potential clients with real-world-like returns. After the news was announced, the COMP token price rose by more than 23% in 24 hours.

Report on Compound Founder's New Company Superstate

The popularity of RWA has reached a new high under the wave of compliance in Hong Kong. Most of the Web3 offline activities in Hong Kong since June are related to RWA. People not only hope to earn better on-chain returns through this narrative, but also hope to attract more traditional funds to enter and create a new wave of the crypto cycle.

But for now, RWA may not be able to fundamentally solve DeFi's "yield problem". Because the asset management model is not yet mature, current RWA is basically limited to exposure to government bonds, especially US government bonds. On the one hand, this reduces the ability of DeFi to resist regulation, and on the other hand, it means that once the Fed reverses, RWA protocols relying on US bonds will fail again and enter an irreversible trend of declining yield. And in the eyes of many, the Fed is not far from reversing.

Related Reading: "The Concern of MakerDao, Not Just Exposure to RWA"

Whether it's Staking, veTokens, or the narratives of Real Yield and RWA, they all reflect the painful struggle of DeFi in the face of the "yield problem". Current innovation in the DeFi field seems to be addressing the symptoms rather than the root cause. Perhaps the only remedy left to cure this disease is to "wait for a bull market".