Curve Founder Deploys New Liquidity Pool to Address FRAX Debt Situation

Analysts said it is an attempt to incentivize liquidity to FraxLend's pool from where Egorov has taken a loan of 15.8 million FRAX.

AccessTimeIconAug 1, 2023 at 9:53 a.m. UTC
Updated Aug 1, 2023 at 6:05 p.m. UTC
  • Egorov has created a new liquidity pool on Curve for FraxLend's CRV/FRAX market, called crvUSD/fFRAX.
  • Such a step could alleviate concerns forming around a possible bad debt situation which has added bearish sentiment to CRV tokens.

Curve founder Michael Egorov has floated a new liquidity pool on his stablecoin-focused decentralized exchange intended to buy time to repay his highly-publicized and potentially market-threatening curve token (CRV)-collateralized borrowing from stablecoin issuer FraxLend.

The new pool, crvUSD/fFRAX seeded with 100,000 in CRV rewards, is dedicated to FraxLend's CRV/FRAX Liquidity pool, from which Egorov has borrowed 15.8 million FRAX stablecoin by locking 59 million CRV as collateral. Markets have feared the liquidation of the FRAX loan and Egorov's CRV-backed loan of 63.2 million tether (USDT) from leading and borrowing marketplace Aave ever since late Sunday's Curve exploit sent CRV tanking.

The FRAX loan has been of particular concern, as under the FraxLend rules, interest rates (annualized percentage yield or APY) on borrowing can double every 12 hours, subject to the pool's utilization rate holding at 100%. The utilization rate refers to the ratio of the amount of assets borrowed to the total liquidity in the pool.

In other words, the interest rate can become astronomical unless more liquidity flows into the pool, bringing the utilization rate lower, as tweeted by crypto research firm Delphi Digital. In that case, the astronomical interest rate alone could trigger the liquidation of Egorov's FRAX loan, putting additional pressure on the CRV token and increasing the risk of liquidation on the bigger Aave loan.

Egorov has floated the new pool to attract more liquidity and reduce the utilization rate, per pseudonymous DeFi researcher Ignas.

"He borrowed FRAX using CRV as collateral on FraxLend. However, because people are withdrawing FRAX from the pool, fearing bad debt in the event of CRV liquidation, the APY has significantly increased," Ignas explained. "He now needs more FRAX deposited to that CRV/FRAX lending pool. That's why the introduction of a new pool on Curve."

Ignas added that the new pool, equipped with CRV incentives, is attracting capital to the critical FRAX/CRV lending pool on Fraxlend, reducing the borrowing APY and "providing him with more time to repay the loan."

Delphi Digital said in a Tweet thread that the new pool is an "attempt to incentivize liquidity towards the lending market in order to lower utilization rates and decrease the risk of his debt spiraling out of control."

So far, the pool, floated late Monday, has attracted over $5 million in liquidity and brought down the utilization rate in FraxLend's FRAX/CRV pool to 54.78%.

The utilization rate has declined to 54.78% from 100% on Monday. (Fraxfacts)
The utilization rate has declined to 54.78% from 100% on Monday. (Fraxfacts) (Fraxfacts)

Edited by Shaurya Malwa.

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Omkar Godbole

Omkar Godbole is a Co-Managing Editor on CoinDesk's Markets team.


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