TLDR
- Curve Finance’s LLAMMA (Lending-Liquidating Automate Market Maker Algorithm) soft liquidation mechanism successfully managed a real-world test during a recent hacking attempt.
- Curve Finance founder Michael Egorov faced substantial liquidation pressures on June 13, 2024, when the CRV token price fell by over 28%.
- Egorov has taken out a cumulative loan of nearly $100 million worth of stablecoins, mostly crvUSD, against $140 million in CRV collateral.
- Egorov’s loan positions on various DeFi platforms like Inverse, UwU Lend, Fraxlend, and Curve’s LlamaLend saw liquidations as CRV prices dropped.
- The CRV token price has fallen over 25% in the past 24 hours, trading at $0.262 at the time of writing.
Curve Finance, a prominent decentralized finance (DeFi) platform, recently faced a significant event that tested its risk management mechanisms.
On June 13, 2024, the price of Curve DAO (CRV) token, the native token of Curve Finance, plummeted by over 28%, sparking concerns within the DeFi community.
This sharp decline in CRV’s value was primarily attributed to the substantial liquidation pressures faced by Michael Egorov, the founder of Curve Finance.
According to on-chain data, Egorov had taken out a cumulative loan of nearly $100 million worth of stablecoins, primarily crvUSD, against $140 million in CRV collateral.
Egorov’s transaction history revealed attempts to manage his debt positions, executing multiple liquidations over a short period. He also made repayments and withdrawals to and from various DeFi platforms like Inverse Finance, UwU Lend, Fraxlend, and Curve.fi’s LlamaLend.
Despite the significant drop in CRV’s value, Curve Finance’s soft liquidation mechanism, part of its LLAMMA (Lending-Liquidating Automate Market Maker Algorithm), successfully managed the liquidation process.
LLAMMA’s soft liquidation mechanism ensures that liquidations occur without resulting in “bad debts” – debt that cannot be repaid or liquidated profitably.
Was not planned, but fascinating how soft liquidations work on https://t.co/bdUCarOsuM. There are docs at https://t.co/zQjPsRK8lQ (same as for crvUSD).
The system showed a fantastic performance. This gave time for liquidators to prepare funds and OTC-liquidate the hacker's… https://t.co/4nG8BIEush
— Michael Egorov (@newmichwill) June 12, 2024
According to the official LLAMMA documentation, when a new loan is created, the collateral is deposited into a specific number of bands across the automated market maker (AMM).
Unlike regular liquidation with a single liquidation price, LLAMMA has multiple liquidation ranges represented by these bands, continuously liquidating the collateral if needed.
However, the documentation also highlights that positions “in soft-liquidation/de-liquidation are suffering losses due to selling and buying of collateral.”
If a user’s position is not in soft liquidation, no losses occur. These losses decrease the health of the loan, and once a user’s health reaches zero, their position may face a hard liquidation, which closes the loan.
Despite the protective measures functioning as intended, the market reacted sharply to the event. Egorov’s loan positions on various DeFi platforms like Inverse, UwU Lend, Fraxlend, and Curve’s LlamaLend saw liquidations as CRV prices dropped.
Blockchain intelligence firm Arkham had forecasted that a drop in CRV’s value of around 10% would trigger Egorov’s positions to be liquidated.
