DEFI climax last week - Can Michael’s massive CRV collateral be saved from liquidation?
Few days ago, Curve founder Michael Egorov’s DEFI debt position made for big on the edge news. Egorov had put almost 47% of CRV’s circulating supply as collateral for his loans on Aave and Frax, with $305m worth of CRV backing his USDT loan on AAVE and $59m worth of CRV backing his FRAX loan on FRAX.
Source. Michael Egonov's CRV collateral and debt position on Curve Finance
There was the lingering danger of his CRV collateral getting liquidated if the price of CRV were to fall below 0.37$, bringing down the value of the collateral backing his $100M loan. Ouch!!
Well, the issue was that if such a huge amount of CRV were to get liquidated, the price of CRV would fall steeply, as exchanges lack liquidity to support the massive selling, of CRV if it should happen. There could be contagion effects on other DEFI platforms that rely on CRV as well, but this article is not about that, there are enough news stories on this explaining the concept better.
Michael’s DEFI holdings & movements could easily be tracked on chain - No financial privacy!!
Egorov’s entire debt, collateral, liquidation position, and his transactions that were happening to pay off his loans were all visible on chain and the media was reporting it live. I was wondering that oh yes, it was a thrilling climax to see if Egnov could pay off or add enough collateral to be safe from liquidation?, or will his CRV position get liquidated, but this is not a sport match right, it's serious stuff.
It’s very serious if CRV price did fall to the level that could trigger Egnov’s liquidation as not just CRV price but the entire Curve DEFI ecosystem could collapse. CRV is used to incentivize liquidity providers, if its price becomes worthless, liquidity providers may pull off their liquidity, on which so many DEFI platforms depend.
This would have contagion effects, and effect peg values of stable coin assets, and pegged derivative assets like stETH.
Curve is the top DEFI platform that provides liquidity for stable coin and staked derivative assets like stETH’s for the entire DEFI ecosystem
Publicly visible DEFI transactions endangered Egorov’s attempts to safeguard his CRV collateral at Frax
Source
Egorov's DEFI holdings in Frax that was available for public to analyse!!
At Frax, Egorov’s CRV was at a higher risk of liquidation since Frax functions using Time-Weighted Variable Interest Rate.
If Egorov’s utilisation rate of lenders’ loan deposits in the FraxLend platform remained high, the interest rate would double every 12 hours, eventually leading to liquidation as the interest rate grows astronomically.
Therefore it was paramount that Egorov reduced his utilisation rate. The problem here was Egorov’s transactions to pay off some of his Frax loan, and reduce his utilisation rate was monitored by users. So, users removed liquidity whenever he paid off some portion of his debt , so Egorov’s utilisation rate of Frax platform's loan deposits did not reduce and remained high.
In privacy preserving dapp Shade Protocol on build on Secret Network Blockchain, Egorov’s transactions to pay off his loan would not be visible, and so users would not be able to target Egorov, removing liquidity whenever he pays back loan to make sure his utilisation rate remained high while he attempts to pay reduce the same by paying some of his debt.
So, privacy DEFI is very much required to be safe from becoming an easy target for others who can measure and do actions that can cause liquidation of deposited collateral.
Publicity of Egnov’s DEFI holdings would not have happened using privacy DEFI dapp - Shade Protocol
This is why I was thinking of Shade App and Secret Network all the while as I read about Egnov’s DEFI assets making news as Shade App that’s built on Secret Network, is a privacy preserving DEFI dapp. THis, means Egnov’s DEFI positions would be his private matter, as none of his collateral holdings, debt position would be visible on Shade App.
Check out Shade Protocol
Shade, a privacy dapp where user’s data is not even revealed to validators of Secret Network Blockchain!!
This is because, Shade App is built on Secret Blockchain which has private by default Smart Contracts. All input transactions are encrypted, they are validated without validators even getting to view the user data, as computation happens in Trusted Execution Environment(TTE) which is a part of a processor where data will be safe and inaccessible to other components of the system.
So, user data (input) is in an encrypted State and is recorded (output)in Secret Blockchain in an encrypted State.
DEFI portfolio details are secure when private, otherwise we become easy targets to be exploited by others!!
Public knowledge of personal DEFI positions is risky as groups can target and manipulate prices causing liquidation of holdings
There was hot news of Justin Sun, the Tron Blockchain founder who most of us don’t trust, buying CRV to bring up its price so to help in Egnov’s CRV position in not getting liquidated. However, there may be elements who could work to bring CRV’s price down, we all know the shorting game is very common in the investment world be it crypto or stocks.
Remember the CEL token shorting games played by groups and who can forget the GME wallstreetbets episode?.
So, with liquidity threshold a common knowledge to the public, there could have been attempts to bring down the price of CRV to liquidate Egnov’s CRV position, thankfully it did not happen. This would not be possible in Shade, as everything is encrypted and will be not known to the public.
As financial transactions can’t happen privately in Curve dapp, it’s a disadvantage!!
The problem with Curve is that it’s not a privacy preserving dapp as its built on public by default Blockchain Ethereum. So, Curve founder, Egorov’s DEFI collateral,liquidity threshold details and his wallet transactions made to repay/reduce his debt was publicised widely with those details visible on Ethereum Blockchain. This definitely echoes the need for privacy DEFI dapps like Shade Protocol.
Privacy DEFI integrated web3 financial system building value in $SHD asset
Shade App as explained is a privacy preserving dapp housing an entire financial system providing a range of integrated Web3 financial services all unified in one platform, functioning powered by $SHD token. SHD is Shade protocol’s native token, governance token.
Shade App’s DEFI functionalities include - lending, borrowing, issuing of decentralised private stable coin $SILK, bonds, swap, staking etc. All these services are powered by SHD, as it’s the token through which LPs are incentivised. The entire integrated financial ecosystem as it functions adds value to $SHD.
Shade’s Borrow module takes deposits as collateral and issues loans in $SILK which is a multi collateralized global stable coin pegged to major world currencies, select crypto and commodities.
Shade wrap module, converts public assets into secret assets converting them into SNIP-25 format tokens that are secret. So, Atom token will be wrapped into sAtom, Osmo to sOsmo and so on.
These publicly visible assets from other dapps and blockchains can be brought to Shade App using the bridge module that transfers assets using Cosmos’s IBC protocol. After which they can be wrapped into their secret versions and used in Shade’s DEFI ecosystem.
More on Shade Protocol in another article!!
Thanks for reading!!