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Decrypting DeFi is Decrypt's DeFi email newsletter. (art: Grant Kempster)

All eyes are on DeFi this week, after the decentralized exchange (DEX) Curve Finance was hit with an exploit.

The platform lets users swap like-assets, such as dollar-pegged stablecoins or various liquid staking tokens, for one another. Maximized to reduce slippage for large trades, Curve is something of an arbitrage trader’s paradise. Even micro-differences between stablecoins can mean massive profits for whales.

Now, though, the project–and its highly-leveraged founder Michael Ergorov–are making headlines for a different reason.


After a recent vulnerability in the Vyper programming language was exploited last weekend, a rather sophisticated attacker was able to nab funds from Curve Finance, along with any of the project’s forks, of $52 million (much of which was also in the project’s native CRV token).

CRV plummeted, which was expected. It dropped from $0.72 on Sunday to as low as $0.50 on Tuesday, per CoinGecko.

Things turned from bad to worse, however, after the various loans that Ergorov had taken out against his massive CRV stash began to sour. He had loans across several DeFi lenders, including Aave and Frax Lend.

If the token were to drop as low as $0.35, his loans of roughly $110 million would have begun being liquidated at that time.

This would have been bad for Ergorov, but it would have also saddled lenders with bad debt.


This kind of debt can’t be recovered, and would likely be recouped from platform users. Aave, for instance, has a safety module—essentially a fund of staked AAVE—that would be used for precisely this.

None of this happened, though.

Instead, Ergorov executed several over-the-counter deals with various notable crypto influencers. These include Tron founder Justin Sun and investor DCF God, while on-chain data shows that several transactions between the Curve founder and other multi-sig wallets from Yearn and Cream Finance also stepped in.

They bought up various amounts of CRV at roughly $0.40 a pop and have sat on it while the panic passed. As of Friday, Egorov has successfully offloaded roughly $42 million in CRV to various investors.

Now, if you understand the 2008 financial crisis, all of this makes perfect sense and may even seem like a huge save.

But if you looked to DeFi as a healthful response to the 2008 crisis, then this week’s events have been a huge loss for the space.

In the first timeline, the one where Egorov is completely liquidated, his losses are socialized to users in order to recoup that debt. This makes those lending protocols look pretty careless for allowing the Curve founder to build such a large position.


In the second timeline, the one in which we’re now living, a suite of really wealthy people basically just stopped all of that from happening, allowing Egorov to avoid liquidation.

Turning back to the financial crisis, instead of the U.S. government bailing out the banks, it was Justin Sun and a bunch of pseudonymous Twitter accounts that bailed out DeFi.

Sure, it’s different than traditional finance.

But is it better?

Decrypting DeFi is our DeFi newsletter, led by this essay. Subscribers to our emails get to read the essay before it goes on the site. Subscribe here

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