Aug 23, 2023

The $70 million hack on Curve, one of the largest decentralized crypto exchanges, revealed cracks in the DeFi promise.

Video transcript

Curve token dropped about 20% this week after Bitcoin Ethereum also tumbled about 10% each last week in a very sudden market drop off Thursday going into Friday. What does that mean for the D I program? Well, if curve token is going down, we have to look back to July. What's happening with Michael Io, the founder of Curve who had a large amount of money out in the lending programs. And as the price of curve started to drop, his margin, call number started to creep up closer and closer. He staved off systematic destruction of D I itself by getting a lot of whales, including Justin son, Jeffrey Wang and others to buy some of his curve backs off of him. But we're not quite out of the woods yet because the price of curve has been steadily dropping. At the same time, the rest of DP I is looking at itself and asking is there enough controls built into our protocols to be able to protect ourselves from systematic risk and the fallout of these different D I token prices, Zach I throw this one first to you. I somewhat expected to see this continue to be an issue because the size of the CCRB token loans out that Michael took, it seems to be this is going to be a continuing issue. There's about $45 million in debt that he has outstanding as of now. Yeah, there's a great quote in this piece uh from Sid Pos uh of Maple Finance saying, hey, you know, this whole, this whole episode proves that bad debt can exist in over collateralized lending, right? Over collateralized lending is a key feature of the D I world, right? Going back to maker, do you had to put up like 3 to 1 to get, you had to, it was a 3 to 1 ratio where you put an E and you get di minted as a as a result, right? And historically, that was seen as a nice safety cushion uh that there was gonna be the the ability to solve these issues based on the over collateralization that's provided in these systems. And now we're seeing again this whole episode sort of really challenge that thesis and really sort of shake D I to its core. Um So now I think people are really trying to think about again, how do we make this more resilient? How do we avoid again, all these trappings of the old financial system that we were looking to avoid and now they're suddenly baked into the D I lending world and how do we fix that? And I think that's the big question that a lot of people in the space who are far smarter than me are really trying to think through so that such that I can be a viable alternative to traditional financial systems where lending and borrowing occurs because it's really far off from that unfortunately. And um this episode I think was um, was eye opening to a lot of folks, I think you mentioned the thing about Wales having to step in and backstop this activity. Um That certainly is um pretty counter to the ethos of what D I should be about. So, whatever the um the whatever solutions come out of this episode, I hope they're good solutions. I hope it's another episode where D I is ultimately battle tested for the long haul. But right now, I think a lot of people are sort of like kind of down the dumps about what this episode revealed about the D I ecosystem uh writ large, but it doesn't mean that people aren't obviously working to fix some of those shortcomings. Uh Jen, I saw your hand and throw it away. Yeah, just off the back of what you're saying, there's um some other good tidbits in here from Paul Fr who's the CEO of Morpho. He said that if the curve situation illustrated anything, it's that defy lending protocols should not be viewed as autonomous pieces of computer code, but as systems that rely heavily on human decisions, he then went on to say that risk management is too tedious and complex for dow and it naturally often falls into the hands of large delegates and risk management firms. And so I just feel like, you know, there are these dow trying to do everything and then we have smart contracts and the only way we can understand where the vulnerabilities are. What we're missing in those smart contracts is to have people use them. Unfortunately. And Wendy, I know you're probably to say it, but every time we talk about di I think it's important to say we're still early and we're gonna see these vulnerabilities. And I think that traditional risk management firms probably don't understand the ins and outs of D I to be able to advise on all of the risks at once. And we're gonna see risk management firms who are specifically targeted to D I products pop out of situations like this. Zach, well, wasn't, didn't gauntlet kind of warn of this. There is sort of ad five risk management thing out there gauntlet and they kind of warned of this and I think it was like poo poo, right? Is that the history of this one will correct me on that because I know that that was, that was sort of the uh the the prologue to what transpired that got a lot of people kind of upset. So worth man worth pointing out that there was sort of this, that, that footnote that uh that can be mentioned. But will if you have any other further contact on that go for it. Yeah. No, they did say stuff like, I think back in January that like Abe's position itself was not manageable and like the curve token uh was like over lended if you could use that word. Uh Michael Agro had put about like 50% of all of this, these tokens across different various D five platforms. And as pointed out in this piece again, there was a, it is very difficult to know like what's happening to other defi lending protocols. But it is systematic in the sense that if you have one DFI lending protocol using a lot of one token and three or four others are also using that token for big loans. Well, if the price, that token starts going down while then your loan might get liquidated across all those and that would cause a systematic issue for everyone. And yes, Gauntlet looked at that wasn't really pushed for it. It's really hard to do that. I think a lot of times and when it comes to D five people have to learn by failing, uh you have to get liquidated. And that's why the these things exist, right margin calls exist for a reason. And that's why there's very high evaluations on these things like exist for reasons. But yeah, it's, it kind of sucks. But I think that's just how DFI learns. And matures and so far it seems like we're out of the woods, but we'll have to keep an eye on what's happening with, with Michael Zach. Will throw it to you though for the next story which we're sticking with. D well, I gotta bounce, pass it down to Wendy. She wants to get, get on this before we change gears. I'm looking at the curve chart and it looks like absolute trash. These are generally, I mean, looking at the weekly chart that these, it literally looks like a pump and dump again. I'm not saying it, it is a pump and dump. It actually did have real utility, but again, is still in beta. A lot of people put way too much faith. A lot of these D I protocols and just based off the fact that the curve CEO founder or whatever it is that he does um the fact that he had so many of the curve tokens put in other different protocols that can easily cause a crypto contagion just like we saw with the centralized exchanges D I is technically still in beta. And if you're putting two much up, you could absolutely get wrecked. And I also thought it was funny because when we started seeing um the, when the bear market initially kicked off, I says we're gonna see a lot of damage due to these collateralized loans. People laughed at me. They're like, you don't know what you're talking about, blah blah, blah. Here we are.

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