With the price of CRV nearing liquidation levels on Aave and other DeFi protocols, concerns are growing over a potential black swan event.
Concerns are being raised over the lack of liquidity to sell a substantial amount of Curve DAO Token (CRV), creating the risk of what some experts are referring to as a potential black swan event, outlined in a thread by OlimpioCrypto on Twitter.
A black swan event would typically represent a sudden and unforeseen market occurrence that could cause a severe impact on prices, market stability or the crypto ecosystem as a whole.
The issue arises from the possibility of CRV dropping below $0.37, leading to the liquidation of 300M CRV in Aave – most from Curve’s founder, according to Defillama.
Curve’s founder staked 300M CRV as collateral in other lending protocols like Aave and borrowed 60M USDT. This approach was chosen instead of market dumping, as selling 60M worth of CRV in the open market would cause the price to crash.
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So the question remains, how are you going to liquidate 300M of CRV in Aave if price drops below 0.37?
The answer is: you can't. At the moment, liquidity is not there.
If you cannot liquidate a position, then the protocol is left with bad debt.
What is bad debt?
— olimpio (@OlimpioCrypto) July 31, 2023
Curve’s situation has been exacerbated by a recent vulnerability in Vyper that allowed hackers to exploit some Curve pools. This occurrence caused CRV’s price to crash, bringing loans that were considered healthy even closer to the liquidation price.
Lachlan Feeney, founder and CEO of Labrys, Australia’s largest on-shore blockchain and Web3 studio, told Crypto Briefing:
Curve getting exploited. Risk of bad debt and liquidations in the ecosystem.
This might seems like an “it’s over” moment, but perhaps it’s just this cycles Black Thursday – the last crash before the bull market, with everything coming back 100x stronger
— Rune (@RuneKek) July 31, 2023