Growing Risks in DeFi – The protocol Aave plays a leading role in the ecosystem ofEthereum. With $5 billion in TVL, it ranks 3rd among DeFi protocols. However, the protocol faces a potential crisis following a substantial loan by Michael Egorov, the founder of Curve and the deposit of millions of CRV tokens.
A loan that raises eyebrows Aave
On June 10, Egorov deposited 38 million CRV tokens on the Aave platform to increase the collateralization ratio of its $71 million stablecoin loan. This deposit has increased the size of its collateral to 285 million CRV.
This colossal loan attracted attention not only for its size, but also because the collateral represents more than 30% of the total circulating supply of CRVs. So far, nothing particularly alarming. However, the situation takes a different turn when we understand the potential implications of this operation for Aave.
Indeed, if the price of CRV were to fall, the loan would no longer be solvent. So, it would be liquidated by the liquidators of Aave. However, due to its size, the liquidation could lead to a wave of chain liquidations, potentially creating bad debt on Aave.
Gauntlet takes the lead
In front of this situation, Gauntleta company specializing in DeFi risk management, has not been sitting idly by.
On June 18, Gauntlet made a proposal to the Aave community: freeze CRV tokens on Aave v2 and reduce the loan-to-value ratio for CRV to zero.
According to Gauntlet, the CRV freeze could prompt Egorov to reduce his borrowing or diversify his types of collateral, thereby protecting Aave from creating bad debt.
Additionally, Gauntlet suggested that the CRV freeze would encourage the loan position to be migrated to Aave version 3, which has better risk management.
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The DAO says no
However, despite Gauntlet’s argument, the Aave community took a strong and unified position on the proposal. Thus, the vote of the DAO was clear and unanimous: all members opposed Gauntlet’s proposal.
Mark Zelleran active member of the Aave community, pointed out that the DAO must respect the central ethos of DeFi, namely the neutrality. He insisted that “ the intent of users or what they do with their funds is not our primary concern “.
At the moment, Egorov’s loan account maintains a health factor above 1.6, indicating no immediate risk of bad debt for Aave. Despite Gauntlet’s concerns, the Aave community seems to have confidence in the current risk management.
In June 2022, the protocol Solend on Solana had been subject to a similar situation. Nevertheless, the protocol had opted for a much less community and decentralized strategy.
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