Traders flock to CRV shorts over concerns about Curve founder’s collateralized borrowing.

Traders flock to CRV shorts over concerns about Curve founder's collateralized borrowing.

The Threat of Liquidation on Curve’s CRV Token and its Impact on the Blockchain Industry

The rapid decline of decentralized exchange Curve’s CRV token has raised concerns within the blockchain industry regarding the potential liquidation of the founder’s borrowed position, injecting volatility into the broader market. Traders have responded by piling into short positions, exacerbating the downward pressures on CRV. In this article, we will explore the background and implications of this situation, as well as the technical details behind it.

Background: The Woes of Curve’s CRV Token

The crisis surrounding Curve’s CRV token emerged on Sunday, when the exchange fell victim to a reentrancy attack. As a result, the price of CRV plummeted, reaching its lowest level since November 22. This decline has sparked anxiety among investors and traders, leading to an increase in short positions in the market.

To understand the widespread fear, it is crucial to examine the borrowed positions of Curve’s founder, Michael Egorov. According to crypto analytics firm Delphi Digital, Egorov currently holds a $100 million loan, backed by 427.5 million CRV tokens, which represent around 47% of the entire circulating supply of CRV. These holdings put Curve and the wider crypto market at risk.

Egorov’s Collateralized Holdings

Egorov’s loan is collateralized by 305 million CRV tokens, against which he has borrowed 63.2 million tether (USDT) from decentralized lender Aave. If the CRV/USDT pair drops to $0.37, the collateralized position will be liquidated.

However, the risk is not confined to Egorov’s borrowing from Aave. He has also supplied 59 million CRV tokens as collateral for a 15.8 million FRAX loan from Fraxlend. This borrowing poses an even greater risk to CRV due to Fraxlend’s Time-Weighted Variable Interest Rate. This interest rate adjusts based on the utilization rate, which measures the ratio of borrowed assets to collateral supplied.

Currently, with a utilization rate of 100%, the interest rate doubles every 12 hours. At a current interest rate of 81.20%, it can be expected to rise to nearly 10,000% APY after just 3.5 days. This astronomical interest rate greatly increases the likelihood of Egorov’s eventual liquidation, regardless of CRV’s price. Such a liquidation would introduce even more volatility into an already weak market, impacting the wider decentralized finance ecosystem.

The Bearish Positioning and Potential for a Short Squeeze

Given the high stakes involved, traders are positioning themselves bearishly by shorting CRV. This pessimistic sentiment is reflected in deeply negative funding rates associated with perpetual futures tied to CRV. These negative rates suggest a prevailing bearish dominance in the market.

However, it should be noted that extreme bearish positioning also presents the potential for a short squeeze. A short squeeze occurs when bears abandon their pessimistic bets, leading to a rapid upward price movement. In this scenario, the market’s higher-than-usual bearish activity, as indicated by CRV’s deeply negative funding rates, creates an environment where even a minor price increase triggers short sellers to close their positions, thereby driving prices further up.

Conclusion

The threat of potential liquidation on Curve founder Michael Egorov’s massive borrowed position has cast a shadow over the blockchain industry, injecting volatility into the market. Traders are piling into short positions, reflecting concerns about the stability of Curve and the wider crypto market. As the industry closely monitors the unfolding situation, the possibility of a short squeeze looms, adding further unpredictability to an already turbulent market.


References

  • CRV Continues to Lose Ground, Threatening Liquidation of Curve Founder's Massive Crypto Borrowings by CoinDesk
  • Decentralized exchange Curve's CRV token continues to lose ground as the looming threat of potential large liquidation of the founder's borrowed position has traders piling into short positions by CoinDesk

Note: This article has been adapted from the original source, with additional information, explanations, and metaphorical language to enhance the understanding of the blockchain industry and its current situation.

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