Abracadabra plans to increase loan interest rates by 200% to mitigate Curve risk.

Abracadabra plans to increase loan interest rates by 200% to mitigate Curve risk.

The Abracadabra Protocol Proposes Interest Rate Increase to Manage Risk Exposure to Curve DAO

The blockchain industry is full of innovations and challenges, with one recent development being Abracadabra Money’s proposal to increase the interest rate on its outstanding loans. The primary objective behind this proposal is to manage the risks associated with the platform’s exposure to Curve DAO (CRV). Though the proposal has received mixed reactions from the community, it sheds light on the importance of risk management and the complexities involved in the blockchain industry.

The Abracadabra Protocol and Magic Internet Money (MIM)

The Abracadabra protocol is a cross-chain lending platform that allows users to earn money by using interest-bearing assets as collateral to mint Magic Internet Money (MIM), a United States dollar-pegged stablecoin. The platform supports assets such as CRV, Convex Finance (CVX), and Yearn.finance (YFI).

To participate in the governance and staking activities of the Abracadabra platform, users need to hold Spell Token (SPELL), the native token of the protocol. This token plays a crucial role in maintaining the decentralized nature of the platform and making key decisions through community voting.

Curve DAO’s Prevalence and Risks

Curve Finance, founded by Michael Egorov, has become a significant player in the decentralized finance (DeFi) space. Egorov holds nearly $100 million in loans across various lending protocols, backed by 427.5 million CRV tokens, which constitute 47% of the total CRV circulating supply. Additionally, Egorov himself has 51.65 million CRV collateral and 14 million MIM debt positions on the Abracadabra platform.

Due to recent exploits on the Curve DAO protocol, there has been a liquidity crisis, leading to a change in liquidity conditions and the listing of CRV as collateral on Abracadabra. This situation has exposed Abracadabra to significant CRV risk, and steps need to be taken to address this issue.

Proposed Interest rate Modification for Risk Mitigation

To reduce Abracadabra’s total CRV exposure, a proposal has been put forward to increase the interest rate. This proposed interest rate modification aims to cut down exposure to around $5 million in borrowed MIM by applying collateral-based interest to the CRV cauldrons. Cauldrons, in this context, refer to borrowing pools where each cauldron corresponds to a specific collateral.

Drawing inspiration from successful implementations in other decentralized autonomous organizations (DAOs) like Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH) cauldrons, the proposal is set to charge interest directly on the collateral. The interest collected will then be moved into the protocol’s treasury, increasing its reserve factor.

A detailed estimation in the proposal calculates that an $18 million principal loan amount would incur a base interest rate of 200%. This would allow the loan to be fully covered within six months, with a decreasing interest rate as the principal is repaid.

Reception and Community Reactions

Voting for the proposal opened on August 1 and will continue until August 3. At the time of publication, 99% of the votes cast were in favor of the proposal. However, there are differing opinions within the crypto community regarding this proposal.

Frax Finance executive Drake Evans criticized the proposal, suggesting it could be considered a governance rug. He highlighted the significant change in loan terms, raising concerns about the overall integrity of the protocol. On the other hand, supporters of the proposal believe that it is a necessary step to eliminate CRV exposure and ensure the long-term stability of the lending protocol.

CRV Stress Test and Risk Mitigation Strategies

With the price of CRV undergoing a stress test, the risk of a token dump has increased. This situation has prompted many lending protocols, including Abracadabra, to look for ways to mitigate their exposure to CRV. The proposal to increase the interest rate aims to combat these risks and create a safer lending environment.

In conclusion, the blockchain industry is characterized by constant evolution and the need to monitor and manage risks effectively. Abracadabra Money’s proposal to increase the interest rate on its loans in response to exposure to Curve DAO is an example of the proactive risk management approaches being taken within the industry. By implementing collateral-based interest rates and utilizing the community’s voting power, blockchain protocols can adapt and navigate the challenges that arise, ultimately fostering a robust and secure ecosystem for all participants.

References

[1] Interest rate hike proposal. Source: Abracadabra Interest rate hike proposal

[2] Abracadabra improvement proposal voting snapshot. Source: Abracadabra Abracadabra improvement proposal voting snapshot

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