Original author: @DeFi_Made_Here

Original compilation: Luccy, BlockBeats

Editors note: Alphabeth Capital analyst and Good Entry consultant @DeFi_Made_Here posted an article on the social media platform analyzing the current challenges and potential risks facing the Curve ecosystem, as well as the debt pressure faced by founder Mich.

@DeFi_Made_Here introduced in the tweet from Michs debt problem to the design limitations of CRV, and expressed his high expectations for the future of Curve. He believed that Mich, as one of the most talented developers in the space, will continue to innovate to promote the sustainable development of the ecosystem. . In addition, the article also analyzes the short-selling transactions of @0x Sifu, Curve’s largest liquidity provider, to speculate on Curve’s next development. BlockBeats compiles the original text as follows:

CRV is like a time bomb, the Curve ecosystem is currently in the hands of suspicious individuals or entities, and Mich is able to repay debts that are growing by $1.7 million per month.

Next, I’ll explain why I see a ray of hope and how @0x Sifu got in on the game.

In August, Mich held approximately 50% of CRVs circulating supply, but due to an inability to sell (lack of liquidity, negative image, etc.), he had to borrow against illiquid tokens to obtain cash.

Everything was going relatively smoothly until Curve was exploited and CRV prices started to fall. Mich was close to liquidation, but he was unable to fulfill his public promise to repay his debts if necessary.

With insufficient liquidity to liquidate his lending positions, the money markets almost went into bad debt situations. Lenders began to withdraw their assets and the annual interest rates on borrowing began to rise. The worst case scenario occurs in the CRV/Frax pool, where utilization reaches 100%.

At 100% utilization, Fraxlends interest rate doubles every 4 hours. To reduce utilization, Mich deployed a new Curve pool and metrics:

A 2-pool pool consisting of crvUSD and Fraxlends CRV/FRAX LP tokens with an initial reward of $100,000 in CRV.

This did not lower the interest rate, leaving Mich with the only option of selling the CRV over-the-counter at a discount to pay off the debt. The $231 million CRV sold for $0.40, for a total sale price of $92 million, with a handshake agreement agreeing to no off-market transactions until February 2024.

See the screenshot below for the full list of counterparties. Including: @wintermute_t, @DWFLabs, @dcfgod, @machibigbrother, @justinsuntron, and others.

Mich obtained enough stablecoins to pay off part of his debt and lower his borrowing rate. The market stopped panicking, but most lending protocols were unwilling to take on too much CRV-related risk, so they tightened policy.

Mich can still borrow on @InverseFinance, @CreamdotFinance, @fraxfinance and @aave v3. But the biggest help came from @SiloFinance, who forked their protocol intentionally or unintentionally to create a CRV/crvUSD market for Mich.

Therefore, Mich borrows again against the CRV. This time $75 million was borrowed and distributed as follows:

· Silo: 46.5 M (from him and related wallets)

· Fraxlend: 15.1 M Fraxlend: $15.1 million

· Others: 13.4M

Borrowing rates at Silo (and Fraxlend) are as high as 30%, which means paying $18.5 million in interest per year. To keep borrowing rates low and provide more liquidity, Mich incentivizes and bribes the Silo pool via @pendle_fi and @Penpiexyz_io.

But who is risking providing liquidity to Mich?

Aside from those depositing through Pendle to get boosted rewards, the largest liquidity provider is @0x Sifu who earns 30% returns on the stablecoin and one more important thing.

He is shorting CRV. This puts more pressure on prices, Mich and lenders. If there are no more depositors in the pool, Sifu can start withdrawing liquidity from the pool and continue shorting CRV.

After my tweet yesterday, Mich wrote in the Telegram group that he learned that someone was using Silos CRV for short trading. He increased utilization, making it very expensive, and Sifu repaid part of the CRV.

If my theory is correct, Sifu could start squeezing Mich in a similar way to Avi:

· Reduce available liquidity to push interest rates higher

· Short CRV to liquidate Mich

Sifu can single-handedly push utilization to 100%, causing rates to rise to over 1,100% in a short period of time. At the same time, he can open a short position of CRV on the perpetual contract and wait for the over-the-counter CRV buyers to sell (the over-the-counter buyers make a profit of 25% -50%).

We can expect something similar to what happened in August. When people started withdrawing their funds and dumping CRV to protect themselves, Mich almost lost everything at that point, but people with interests saved him.

But lets assume that @0x Sifu is a benevolent actor and will pay off his CRV debt ordinarily and continue to provide liquidity to Mich, and OTC buyers will not take similar actions. Does CurveFinance have a future?

I have been criticizing the CRV model and claiming that it is unsustainable. Although Curves situation is expected to improve with the introduction of crvUSD, crvUSDs liquidity provider is also unsustainable.

crvUSDs liquidity providers are directly incentivized by Mich with CRV. Obviously, this wont last forever, especially if CRV prices continue to fall. But Mich took inspiration from ve 33 DEXes and came up with the idea of ​​allocating crvUSD revenue only to those LPs who voted for crvUSD. CrvUSDs fees account for nearly half of the DAOs revenue, so the incentives for crvUSDs liquidity providers will be very attractive.

In addition to this, there will be isolated lending pools with crvUSD liquidation algorithm. Not much information is available on the matter, but crvUSD will not be backed by the currency in the pool.

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

However, Mich is one of the most talented developers in the space and is constantly innovating. Hopefully, the upcoming events will not harm Curve, and the design limitations of CRV will allow the ecosystem to continue to grow.

Original link