Summary
- Freezing and setting LTV->0 will have little impact.
- Aave can’t be as aggressive as other protocols due to the outsized CRV exposure.
- CRV collateral will rapidly lose value if this position nears liquidation. It’s in Aave’s best interest that the CRV market remains healthy as the user winds down their position.
CRV Market Freeze
There’s a growing narrative in the forums that freezing the CRV market prevents further borrowing. Unfortunately, that’s not the case. Even if we were to enforce an immediate freeze, the wallet’s health score is still ~1.83. An additional ~33.5m USD can be borrowed at current CRV prices. Similarly, while a freeze will prevent further CRV deposits, it does not afford guarantees in significantly curtailing the existing credit line. It prevents the user from top-ups aimed at maintaining health levels. The user in question has been repaying significant debt over the past few days, and redeeming CRV, minimizing Aave’s CRV exposure.
LTV->0
The proposal to set LTV to 0 is at the AIP stage and is expected to be approved and executed in the next few days. Regrettably, a technical limitation in V2 means that setting LTV to zero does not inhibit additional borrowing, as mentioned in previous discussions. As a result, this change will have a limited impact and doesn’t offer us any assurances or reduce our exposure.
Why Aren’t We As Aggressive As Other Protocols?
Aave’s exposure to CRV exceeds that of the second-largest protocol by ~5x. We can exert aggressive pressure on the position towards liquidation, but the CRV market is illiquid at a significant size. Although there seems to be an OTC market for Curve at $0.40, we doubt that current demand can currently cover the borrower’s entire position. Aave and our industry’s collective interest is for CRV to weather this storm. In fact, the market is pricing it as such, as the AAVE/CRV correlation has been 0.92 over the past week.
We aim for Aave to retain collateral of value, affording the borrower optionality to repay depositors and prevent a shortfall event.
Why Does Aave Benefit From This Position Maintaining Its Health
As the position reaches liquidation, liquidity on the ask side will lessen. Even without extreme volatility, the ±2% order book depth is ~350K and ~590K USD on the Binance CRV/USDT spot market.
A healthy CRV market benefits Aave and maximizes the probability of recovering the debt.
Collaborating with the Borrower
The technical limitations of V2 mean we need to find another solution to minimize the risk CRV poses to Aave. Fortunately, this situation is one where we know who the borrower is. Aave community members communicate with him and think that with some finesse, we can come to a reasonable conclusion to this episode.
It’s also important to note that the borrower has been liquidating sizable chunks of CRV via OTC over the past few days and repaying debt. We’re hopeful this trend continues.
Next Steps
- Chaos Labs is preparing AIPs to disable borrows on V3 Ethereum and Polygon.
- When markets stabilize, we will continue our series of incremental LT reductions to wind down the CRV V2 ETH market.
- In collaboration with @Gauntlet, we support reducing CRV LT on Ethereum V3.
As always, we’re available; feel free to reach out if you have any questions.