Avraham Eisenberg attacks Aave, $crvUSD whitepaper released, ren-assets are offboarded from DeFi,...
Issue #16 of The State of DeFi Lending newsletter
Welcome to issue #16 of The State of DeFi Lending, a newsletter covering the highlights of lending markets in DeFi.
In this issue we cover
Avraham Eisenberg attempts a loop-borrow attack on Aave leaving $1.6m in bad debt behind
Curve Finance publishes the long-awaited whitepaper for decentralized stablecoin $crvUSD, featuring novel mechanism designs
REN Protocol - the team behind renBTC - got hit by the Alameda/FTX bankruptcy. The team announces deprecation of v1 and MakerDAO swiftly offboards renBTC.
Read below for more…
News
Avraham Eisenberg has attempted an audacious attack on the Aave protocol by following his exploit pattern of loop-borrow & -trades. This time the $CRV token was at the center of the attack.
The strategy relies on heavily shorting $CRV by depositing $USDC as collateral on Aave, borrowing $CRV and subsequently selling them for $USDC which is then again deposited into Aave. This is the so called loop-borrow pattern.
At first, CryptoTwitter was expecting that Eisenberg would liquidate one of the Curve founders who had deposited $48m of $CRV into Aave as collateral to borrow. The liquidation price was around $0.259 and the $CRV price fell as low as $0.40 during the day.
However, in a dramatic turn of events, the $CRV price started rallying up to $0.72 on 22 November. Traders were expecting that Eisenberg wants to force a gigantic short squeeze which would force Aave’s liquidation mechanism to acquire substantial amounts of $CRV. Hence, traders jumped on this short squeeze trade.
Curve also released the long-awaited $crvUSD whitepaper (see next article below) which further added fuel to the price rally.
It is unclear what the desired attack outcome was supposed to be. CryptoTwitter is speculating that Eisenberg attempted to bankrupt the Aave protocol and to dump the $AAVE token price. However, no specific evidence could be found.
However, the attack is leaving Aave with 2.68m $CRV (c. $1.6m) in bad debt. The address of the insolvent account is accessible here.
Aave can resort to a number of different tools to compensate for the bad debt.
The entire episode has also shed light into the practice of “rehypothecation” which is a feature of Aave markets. Aave’s lending contracts deposit the lending assets into the borrow pool, which a trader can borrow and then deposit (ie lend) again, basically enabling the loop-borrow scheme.
Curve releases the long-awaited $crvUSD whitepaper, which is Curve’s version of an overcollateralized crypto stablecoin.
$crvUSD has been hinted at previously by the Curve team and now major details have been released. The focus is on a few key features which aim to differentiate the mechanism design from other overcollateralized, decentralized stablecoins like $DAI or $LUSD.
One of the key features that gets the most attention is the liquidation mechanism. The main problem with DeFi borrowing is that liquidations are dependent on DEX liquidity which is dynamic (i.e. it can disappear in an instant). If there is no DEX liquidity, liquidations cannot be successfully carried out. BProtocol offers a dedicated tool for any lending market to activate stability pools that provide backstop liquidity in any market environment. The protocol’s B.AMM is currently integrated with Liquity’s $LUSD and Chicken Bonds, Hundred Finance and Vesta. Most other lending protocols do not have such stability mechanism yet.
In the case of $crvUSD, there is a mechanism called LLAMMA (short for lending liquidity AMM algorithm): If a user deposits $ETH to mint $crvUSD, the deposit gets transformed into an ETH/crvUSD LP position. If the $ETH price falls, the LP position sells some $ETH and buys $crvUSD. This process is reversed if $ETH price rises again. This mechanism smooths out the volatility of the collateral to minimize liquidations.
The whitepaper is accessible here. In case you feel motivated to dig in: The Curve team is already teasing some simplified version for easier comprehension.
REN Protocol will sunset v1 as funding from parent company Alameda dries up. REN’s flagship product renBTC serves as a collateral/LP assert across a number of DeFi protocols, of which MakerDAO has been swift to offboard the asset.
The REN team had been acquired by Alameda in 2021 and thus the recent bankruptcy of FTX/Alameda sent warning shots across DeFi as the integrity of the ren-assets came into question.
The REN team itself published a roadmap for their transition to v2. This roadmap also includes external fundraising needs.
The REN team will disable mints for ren-assets but will enable holders to burn their ren-assets for another 30 days. The team also advises DeFi protocols the deprecation will impact liquidity across DeFi.
MakerDAO was very quick to react and set the LTV for renBTC to 0 as part of an urgent executive vote on 12 Nov.
renBTC is an asset that features prominently in Curve’s pegged BTC pools, see below article for a detailed explanation.