Is DeFi in danger?

By EdgyAugust 3, 2023

Wow, what a week. Curve Finance was hacked for $70m earlier this week. And there’s a big problem…possible liquidation of a massive loan.

The founder of Curve, Michael Egorov, took out a $100m loan on Aave using Curve tokens as collateral a while back. Why the heck does he need all that cash for? Well, there are some rumors that it has to do with this…

Curve finance CEO buys Australian mansions

So with the price of CRV tanking due to the hack, he’s been scrambling to find millions to pay off his loans to prevent liquidation.

Before we begin, I have a few DeFi Edge announcements:

  1. We’re hiring a research intern. The deadline’s in a few days!
  2. We just launched a new website. We’re making a push towards more original, long-form content.

This operation’s slowly growing – thank you so much for your support over the past year! We won’t let you down.

Here’s what we got today:

  • The Curve Contagion. The shocking hack of Curve.
  • Major LSDfi sectors. The five categories of LSDfi protocols.
  • Around the Web. Evmos v2 is live, Tether reports 850 million Q2 profit, and more.

Today’s email is brought to you by Stader Labs, stake on Stader now.

weekly data numbers

“The greatest life lesson is to know that even fools are right sometimes.” – Winston Churchill


The Curve Contagion

A defeated soldier.

Ethereum just received the world’s worst birthday gift (almost as bad as when my mom bought me a denim vest).

July 30th was Ethereum’s 8th birthday. On the same day, Curve Finance was hacked. Curve is a DEX that formed a core part of the Ethereum DeFi. It’s one of the cornerstones of DeFi liquidity.

What happened? So this has nothing to do with Curve’s code itself. Vyper is a programming language that was used to create several Curve pools. Specific versions of Vyper contained a bug (concerning “reentrancy” preventions). Attackers exploited that. The following Curve pools were hacked:

  • peth/eth (@JPEGd_69)
  • aleth/eth (@AlchemixFi)
  • crv/eth (@CurveFinance)
  • mseth/eth (@MetronomeDAO)

If you are looking for a simplified explanation, click here. If you want the technical breakdown, here’s the post-mortem provided by LlamaRisk.

​Around $70M was hacked. But, thankfully, whitehats were able to catch a portion of the funds and gave them back to Curve.

​You might say, “Yeah. 70M is a large number. But in DeFi, these hacks happen every other month. Why is everyone making such a big deal out of this one?

From Hack to Havoc

Here are some of the consequences from the exploit.

#1 Many protocols were hit. The pools of JPEG’d, Metronome, and Alchemix were directly hacked. Alchemix was subsequently forced to halt several contracts.

#2 Curve’s TVL tanks. Curve constitutes a core piece of DeFi. And everyone trusted it. It had more than $3.7B in TVL. Now, they’ve lost around 50% of their TVL. CRV prices also took a hit. If even Curve could be hacked, we should all take smart contract risks more seriously.

#3 The programming language risk. The problem didn’t lie in the Curve team’s code. Rather, it was inherent in the programming language used. Vyper (the 0.2.15, 0.2.16, and 0.3.0 versions) had malfunctioning reentrancy locks.

Vyper is widely used across the ecosystem. Around 460 contracts have already been written using these problematic versions of Vyper. This is similar to someone discovering that the foundation of their skyscraper wasn’t built properly.

#4 Who did this? This wasn’t just another hack. It required gigantic levels of time, resources, and expertise. A few even suspect nation-state-level actors may have done this. So, we should be concerned.

#5 Potential liquidation cascades. Many protocols accept CRV as collateral, including Aave, Abracadabra, Fraxlend, Inverse, and Silo.

Now, the hacker controls a large percentage of CRV tokens. If they sell them, CRV prices will tank, and protocols will be forced to liquidate CRV. But if these protocols cannot liquidate CRV properly, they’ll be left with bad debt.

Everyone was worried about the loans of Curve’s founder, Michael Egorov. He had around $100M in loans backed by 427.5M $CRV (about 47% of the entire CRV circulating supply). If his positions were to be liquidated, that would be the first domino in a series of disasters.

He has staved off the danger by selling part of his CRV stack and paying off part of his loans. But, it is still important to monitor his position.

He has been selling CRV tokens OTC (over the counter) for $0.40c, well below the market price. Buyers include the infamous 0xSifu (Of Wonderland fame), Justin Sun (Tron), Machi Big Brother, DCF God, and more.

These are supposedly locked for 6 months+.

Now what?

The situation feels more stable. CRV’s price is stable and the liquidation price is around 34 cents.

I remain optimistic that Curve will pull through.

  • Over time, Curve will regain trust.
  • CRV prices won’t tank enough to cause a contagion effect.
  • Teams will race to fix the issue with the problematic versions of Vyper.

Lots of lessons to be learned from this. While Curve’s codebase was solid, the compiler it used wasn’t. And it should’ve been an industry red flag regarding how much CRV was being used as collateral for a loan.

Together With

ETHx: Stader Labs’s LST, designed to keep Ethereum decentralized

If you missed that introduction, here’s a quick recap of Stader Labs and ETHx:

  • Stader Labs is a non-custodial, multichain liquid staking platform with a presence on seven chains – including Ethereum, Polygon, BNB, and Hedera.
  • ETHx, Stader’s Ethereum Liquid Staking solution, launched on July 10th – currently, it sits at $18.2M TVL.
  • There is a 1.5x staking boost for the first 30 days and $800k in upcoming LP rewards for the first 90 days.

This week, we’re highlighting its unique differentiators. Why choose ETHx over existing Ethereum Liquid Staking solutions? 🤔

#1 Staking rewards:

  1. ETHx offers 5.7% staking rewards and an additional 8% in rewards with wallet partners like OKX.
  2. Many DeFi partnerships and rewards of 20%+ with DEXes like Balancer and LSTfi protocols like Pendle.
  3. Exclusive rewards for DAOs.

#2 Accessibility:

  1. For users, there is slashing protection with a 4 ETH bond.
  2. For node operators, 4 ETH is the lowest bond requirement.

Node operators will also get 40% higher rewards than solo stakers. You should keep an eye out for the ETHx DVT pool too 👀.

Power up your ETH with ETHx.


Major LSDfi Sectors

Ice cubes that together look like Ethereum logo.

While everyone’s distracted by memecoins and telegram, I still think LSDfi is the most interesting narrative in DeFi.

1) ETH’s staking ratio of 18.46% which is low compared to other chains
2) LSDfi’s penetration is small
3) Possible Ethereum ETF

You might’ve heard of major LSDs already like Lido, Rocketpool, and FraxETH. Did you know there’s an entire ecosystem based around it called LSDfi? The best way to understand it is to look at the different categories.

#1 DEXes

DEXes allow users to swap one token for another. They facilitate exit liquidity for LSDs. Generally, protocols won’t always be able to convert LSTs into ETH due to withdrawal queues immediately. So instead, they create liquidity pools to allow users to exit their LSDs immediately.

Curve, Balancer, Uniswap, and Maverick are the leading DEXes for LSDs. OG protocols dominate this category due to being more trustworthy.

#2 Lending Markets

These are protocols that facilitate lending and borrowing between protocols.

Aave, Compound, Morpho, Silo, and FraxLend are a few of those lending protocols. Cat-in-a-box and Ion Protocol are some newer examples.

#3 Stablecoins

The most successful crypto-backed stablecoin model is the Collateral Debt Position (CDP) stablecoin. CDP stablecoins are created by depositing crypto as collateral and minting stablecoins.

​The emergence of LSDs meant stablecoins could now be minted using LSDs as collateral. And that’s what happened. MakerDAO, the OG stablecoin, is dominating this market as well.

However, there are many innovations as well:

  • A yield-bearing stablecoin from Lybra Finance
  • Immediate 6x leverage on staking rewards from Raft
  • Ethena is based on Arthur Hayes’s design for a stablecoin

​There are many new CDP stablecoins. I’d be retired by now if I had a dollar for every stablecoin I saw in LSDfi.

#4 Index LSDs

Some protocols issue tokens that represent a basket of LSDs. For example,

  • $dsETH from Index Coop represents three LSDs: rETH, stETH, and sETH2
  • $yETH from Yearn Finance represents a basket of tokens, including rETH, wstETH, and sfrxETH.

Why do we need such tokens? Here are a few reasons:

  • Spread risks
  • Boost yields (sometimes)
  • Exposure to a basket of LSDs

​unshETH is a great example of an innovative protocol in this area. They created a swap market for LSDs, drawing on the LSDs they already had. Its users can swap between LSDs. This gives the provider an additional revenue source: swap fees.

#5 Yield Strategies

This category includes all the protocols which make use of the yield from staked Ether:

  • Flashstake gives users instant upfront yield
  • Pendle enables the trading of yields from staked assets
  • Penpie is a convex-like protocol on top of a Pendle

There could be other protocols that don’t fit into these categories as well. EigenLayer is such an example. We have covered it in a previous issue.

If you’re interested in going into this rabbithole, we wrote a deep dive on the LSDfi space.


What is it Like Working /w The DeFi Edge

The DeFi Edge is hiring a research intern! 

Some of you might be wondering what working with Edgy is like. So I thought I’d chime in with my experience.

Hi, my name’s Yayya. I started working with Edgy in October last year. I primarily help with research and writing the newsletter (I’m the guy hunting down all the catalysts for you each week).

When I saw that he was hiring for The DeFi Edge, I immediately applied. And after a challenging interviewing process, I was offered the position.

And even though I was excited, I was facing a dilemma:

Should I continue preparing for my MBA, or should I join Edgy? Should I follow a neatly laid-out career path, or should I take the leap and learn everything first-hand about my favorite industry?

In the end, I decided to join The DeFi Edge. And it was the best decision I have ever made. Here’s what I love about working here:

1) Get paid to read and write about DeFi. This is my absolute dream come true. Reading about DeFi is my passion. Now, I’m able to make a living doing it.

​The best part: I can work alongside a supportive boss and great coworkers. My seniors always talked about how horrible their bosses were. I can’t relate to them at all. Edgy is more like a mentor to me. Everyone else on the team is super competent as well.

2) Learn frameworks for running a business. When I joined, I was a 21-year-old who knew nothing about business. Edgy is transparent with the financials and every decision with the company. There’s no drama or politics – just a relentless focus on research and creating world-class products.

Thanks to him, I’ve witnessed how an elite business operates. (The book recommendations Edgy gives are also top-notch).

We’ve grown a lot since when I first joined. We now have successful products and an effective team. And we’re going to keep growing under Edgy’s leadership. To rise to the next level, we are looking to hire a DeFi Research Intern.

If that sounds interesting to you, apply for the position. This opportunity has changed my life, and I’m sure it will again for the next person.

​🚀 DeFi Catalysts

Evmos 2.0 is live. It has improvements such as EVM Extensions, Dynamic IBC, New tokenomics, Easy onboarding, etc.

Frax Finance is set to release Frax v3 this month. It’ll be a completely new design. And it’ll fully disconnect FRAX from fiatcoins such as USDC & USDP.

Rebase, a bridge between Base and Ethereum, is live. The users will qualify for the governance token airdrop.

THORchain introduced Streaming Swaps. It will allow patient swappers to get better price execution by splitting large transactions into sub-swaps.

Shibarium has released a testnet bridge for transferring tokens with Ethereum. Shibarium will be an Ethereum-based Layer-2 network. SHIB is a leading memecoin.

Chronos Finance introduced their v2. It has many new features, including Chronos Concentrated Liquidity, New maNFT Contracts, and more.

Mars Protocol deployed the Red Bank on Neutron. It is the first-ever credit protocol on Neutron. Neutron is the first Cosmon Chain to launch on “Replicated Security.”

Abracadabra is voting on a proposal to avoid Bad Debt from CRV collateral. They plan to automatically sell CRV tokens to liquidate the position unless topped up with more collateral.

Beefy Finance has unveiled its Migration plan. Their token was caught in the middle of the Multichain disaster and became useless. They’re redeploying and distributing their token to holders.

Popsicle Finance introduced its new token, WAGMI, along with a new tokenomics. Its previous token, ICE, will be equal to 69 WAGMI.

Balancer DAO is deciding on the final parameters before their launch on the Base chain. Being the leading DEX on Base is an attractive trophy.

SushiSwap is live on Base. All the major DEXes are launching on the L2. And we will see intense competition between those.

Celo Blockchain‘s proposal to transition from a Layer1 blockchain to a Layer2 on Ethereum has passed. 128 out of 131 voters were in favor of the transition.

​📰 Industry News

​The IRS said that crypto staking rewards will be taxable once the investor gains control over the rewards.

​FTX’s bankruptcy administrator proposed to reboot the offshore exchange with third-party investors.

US prosecutors dropped Sam Bankman-Fried’s campaign finance charge. He still faces other charges, including bank fraud conspiracy.

Tether reported a net profit of $850 million in the second quarter. It brings Tether’s excess reserves to around $3.3 billion.

​The SEC had asked Coinbase to stop trading off all crypto assets except Bitcoin. Brian said that the recommendation forced Coinbase to head to court.

Six entities have filed applications with the U.S. Securities and Exchange (SEC) for Ether (ETH) futures-based exchange-traded funds (ETFs).

The SEC is suing Richard Heart and his projects Hex, PulseChain, and PulseX. He is accused of raising over $1 billion via unregistered securities offerings and defrauding investors.

Consensys released Fuzzing, a tool to automate the smart contract security testing process. With this tool, devs won’t have to set up a special infrastructure.

Sequoia Capital has cut the size of its crypto fund to $200 million from $585 million. It is a reduction of more than 65%.

Litecoin underwent its third halving. While leading up to the halving, the price did go up. However, it went down on the day of halving.

​🧠 Twitter Alpha

​😂 Meme