Wire 8/3 - DeFi Reels as Curve Finance Suffers $50 Million Hack
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The Story
DeFi Reels as Curve Finance Suffers $50 Million Hack
Just a few weeks ago, cryptocurrency markets were celebrating Ripple's partial victory in U.S. courts, seeing it as a positive sign for digital assets. But the celebrations didn't last long because news of an attack on Curve Finance shook the decentralized finance world.
On a Sunday morning in Eastern Time, hackers took advantage of a bug in several versions of Vyper, the programming language used for some stablecoin pools on Curve, a prominent decentralized exchange (DEX). The bug allowed them to drain?around $50 million in stablecoins ?from several of Curve’s pools.
The?first sign of trouble was at 9:10 a.m. ET on Sunday , when $11 million in pETH/ETH was drained from a pool. A tweet at 10:17 a.m. ET from an account linked to JPEG'd, a platform that allows users to borrow against NFTs,?posted on Twitter/X , "There was an attack on the pETH-ETH curve pool… The issue seems to be related to the curve pool."
It took a couple of hours for the market to respond with a selloff in the curve (CRV) token after that tweet went out (marked as “E” in the chart below).
About two hours later,?Vyper’s developer acknowledged the bug , and within six hours, CRV had dropped about 20% since the attack started.
While whitehat bot c0ffeebabe.eth managed to recover around $5.5 million in ether, Curve founder Michael Egorov had to use?his substantial holding of CRV ?(34% of total CRV, worth $168 million) ?to get collateral for loans on various platforms to protect the exchange.
If the price of CRV had fallen to $0.34, Egorov's entire position could have been liquidated, causing potential cascading effects throughout DeFi due to the exchange's significance and the?loans made with key players ?in the ecosystem.?
Based on?on-chain data , it appears that Egorov has recently been using the OTC markets to enhance?the health factor of his borrowings ?(similar to increasing the coverage ratio in a traditional loan)?at a rate of $0.40 per CRV , all the while avoiding significant disruptions to the market. As of this writing, CRV is trading at $0.588.
As a result of the hack, the total value locked on Curve dropped from $3.26 billion to $1.7 billion at the time of writing. Still, these figures are still far lower than the $24 billion total value locked the exchange had at the beginning of 2022.
Interestingly, centralized exchanges played a role in saving the day for Curve Finance and DeFi. Since?Curve uses Chainlink oracles , which include a few centralized exchanges (CEXs) for price feeds, these exchanges proved helpful during the crisis. Binance founder Changpeng "CZ" Zhao even took to?Twitter to boast , stating that "CEX price feed saves DeFi. ???? ♂?"
Despite speculations about the decline of FTX and regulatory pressures on Binance and Coinbase, it's evident that centralized exchanges will continue to play a leading role in the crypto world for some time to come.
Data Points
Five Charts of the Week
DeFi may have experienced a volatile week, but bitcoin's implied volatility continues to decrease. The at-the-money implied BTC volatility for options expiring on Friday on Deribit, the largest crypto options exchange, currently stands at 33%, a decline from the 44% recorded for a comparable expiry a month ago.
While traders of Curve Finance's CRV token remained firmly resolved on the short side, the bearish sentiment has significantly eased since Tuesday. Funding rates plummeted to an astonishing -350% annual yield before recovering to a still remarkable -91%. Negative funding rates indicate that short sellers are willing to pay long investors to maintain their positions open.
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CRV also experienced a staggering surge in open interest, accompanied by a significant number of liquidations. In the four months leading up to the attack on Sunday, the average open interest stood at $46.8 million. However, by August 1, it skyrocketed to an impressive $139.1 million. Notably, between July 30 and August 1, there were $4.7 million in long liquidations and $2.9 million in short liquidations, approximately half the totals observed during the previous four months.
Over the past few days, volumes in DeFi have indeed increased, especially evident in transactions involving ether, the most popular cryptocurrency in decentralized finance. However, despite the growth, overall volumes for the sector weren't astronomical.
Amid the excitement surrounding DeFi, centralized exchanges have not witnessed any significant uptick in response. In terms of volume, decentralized exchanges continue to represent only a fraction of their centralized counterparts.
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