DeFi
DeFi founders using DeFi to buy mansions is not the problem
But something is wrong with the lenders’ settings if a single entity can borrow against 30% of a token’s market cap.
Every now and then I see people in crypto – this open, decentralized ecosystem based on market economics – suddenly turning into communists saying that founders shouldn’t get rich and buy mansions.
The problem is not that founders get rich and deploy their wealth into DeFi protocols, within their established parameters.
This is because DeFi protocols need better parameters.
Curve Finance founder Michael Egorov took out approximately $100 million in stablecoin loans collateralized by $140 million of Curve’s CRV token. The risk of its loans being liquidated had loomed over DeFi for months and this week it finally happened. Egorov was liquidated.
Some takeaways from this.
DeFi doesn’t care
The first is that it turns out that the massive loans backed by Egorov’s CRV did not pose as huge a risk to DeFi as previously thought.
The concern was that if the price of CRV fell enough that Egorov could not provide the additional collateral needed, then that CRV collateral would be liquidated, and if the loans are not repaid, this would leave DeFi protocols with debt debt. through five different DeFi lenders who had Egorov’s positions.
It’s important to note that the $140 million in collateral represents approximately 30% of CRV’s market capitalization, meaning it would be difficult to sell that much CRV on the open market to cover these loans. This single individual had therefore begun to present an almost systemic risk to DeFi.
But this dreaded scenario happened and beyond the CRV crater, DeFi lenders remain in good health overall. Lenders’ TVL, collateral ratios and lending rates all remained stable throughout Egorov’s liquidation.
Egorov cashes in
Then some people are sounding the alarm that Egorov is taking out massive loans against his token and even blaming him for buying a huge mansion.
In my opinion, Egorov should be able to get rich from founding Curve and cash out his CRV stack, the same way Web2 founders get rich from their company’s equity.
A small difference here is that Egorov, instead of selling the CRV, took out loans against it, and now that the CRV has been liquidated, this was an indirect way to sell.
What I think could be criticized is how quickly he started to cash in. Typical founder vesting schedules last 4 years with a one-year cliff. This means that founders cannot sell any shares during the first year after obtaining them. After the first year, they begin vesting their shares on a monthly or quarterly basis over the remaining three-year period.
In the case of CRV, the token was launched in August 2020 and as early as December, Egorov started borrowing on Aave. Still, borrowing against tokens isn’t exactly cashing out, and one could argue that liquidations four years after launch roughly match the average vesting schedule for founders.
Better rules
I don’t think the right idea here is that DeFi founders shouldn’t use the very infrastructure they built and the tokens they launched to borrow more crypto. They simply use DeFi, follow DeFi rules, and pay market rates. There’s nothing wrong with that.
I think the problem here lies in what these DeFi rules are.
There is definitely something wrong here if someone is able to put up 30% of a token’s total market cap as collateral, especially for tokens that don’t have enough liquidity to be able to find buyers worth this guarantee within a short period of time.
So, even though all lending protocols take into account their own lending ratios, we should take advantage of the fact that DeFi is completely transparent and ensure that lending protocols also take into account overall lending ratios. What is the total collateral and total loans taken out against assets across DeFI.
Onetruekirk, the founder of Credit Guild, also makes this point. It recommends that when global leverage ratios become risky, protocols gradually change the parameters, including setting the loan-to-value ratio at zero, gradually increasing the liquidation threshold, and increasing interest rates.
So now that this Egorov liquidation threat has come true, DeFi remains strong, but lenders should learn from this fear to de-risk the ecosystem.