Summary
The freezing of this market is a train that left the station over 12 months ago. The top CRV account holds a massive position in a market starved of liquidity. If we agree that we’re already knee-deep in exposure, a freeze at this stage is more of a token gesture than an effective strategy. It would only serve to handcuff an account that has historically shown sound management, hindering its ability to top up. Instead of cosmetic measures, we should zero in on impactful solutions involving additional LT reductions and increasing the RF with regard to CRV and broader V2 markets.
Analysis
In the context of the V2 framework, the scarcity of risk levers considerably narrows our operational capabilities. While freezing can offer some advantages, it concurrently presents potential obstacles. The upside is clear - freezing limits additional CRV risk exposure. However, a freeze could unintentionally trigger heightened levels of FUD, exacerbating the concern already sparked by this post and potentially accelerating a CRV depreciation. Following a freeze, account holders are precluded from topping up, and given the prevailing sparse market liquidity, the trajectory toward bad debt could be alarmingly precipitous.
It’s worth noting that CRV’s total supply has exceeded $100 million in markets with declining liquidity for over a year.
$CRV supplied to Aave has posed an asymmetrically large risk for at least the past 12 months.
The opportune moment to propose a freeze was in the past. As of now, we’re applying a superficial solution to a much deeper issue. Our simulations show potential bad debt amounting to tens of millions, given the unprofitability of liquidations due to insufficient liquidity. Although capping the exposure seems appealing now, it fails to address the core issue.
Historical analysis of the top position shows that the user has been active and has been protecting their wallet health over time.
Freezing the market would block the user from doing so. Furthermore, we must acknowledge that a freeze, immobilizing large CRV positions, could incite significant market turbulence. In this regard, a new economic attack vector has surfaced, potentially creating a vulnerability for a speculative attack on the CRV token. Speculators recognizing this potential setup, particularly if well capitalized, are likely evaluating the risk-reward characteristics of mounting an Avi-style attack. For stakeholders who maintain a long-term bullish stance on CRV and aim to maximize accumulation, this scenario, where the price could depreciate rapidly, presents an opportunity to repurchase at a considerable markdown; thus, such investors can be very patient in their accumulation plans due to the current unfolding series of events.
Conclusion
As reiterated throughout this discussion, the implementation of a freeze is a severe measure and should be reserved for scenarios where it has the potential to enact material impact. In the case of CRV, Aave has been in a state of overexposure for over a year, and the right time for a freeze was then. Although not fiercely against a freeze, at this moment in time, its impact will be negligible and potentially very counterproductive. The market is highly volatile, and the top account holder has consistently demonstrated active risk management and maintenance of their position’s health. Regarding CRV, given V2’s high vulnerability to market volatility, we advocate against freezing, especially given the top accounts’ history of active risk management. We will be following up shortly with an ARFC to reduce CRV LTs.