This Week’s Forum Threads (August 2nd)

Here are this weeks forum debates I recommend you follow:

Aave’s CRV Market Debate

With the recent Curve exploit, the price of CRV has come under significant pressure. A token struggling post exploit is nothing new for DeFi. Still, an exploit affecting a major DeFi protocol has substantial ramifications for the entire ecosystem – double so for Curve, as the founder has a large amount of the supply. Again, concentrated token supplies are nothing new to DeFi, but it is what the founder of Curve has done with their tokens that is causing waves with Aave. The founder has used some of their $168M of CRV tokens to collateralize a $60M loan on Aave – a loan which, if Aave liquidates it, could leave Aave with bad debt as the collateral far outstrips liquidity for the CRV token. Bad debt in Aave is backed by those who stake Aave in the safety module. If Aave has bad debt, the safety module will cover it to make depositors whole. Aave wants to avoid bad debt, as selling AAVE in the safety module to cover bad debt hurts their protocol, token, and lenders (because a falling price of AAVE reduces the amount the safety module can cover).

To help solve this situation, Chaos Labs, an Aave contributor, has started a thread on Aave to work through some possible solutions. Chaos Labs has proposed winding down the V2 CRV market and disabling CRV borrows on V3. Chaos Labs also presents options for setting the LTV of CRV to 0 and freezing the CRV market – although they do not view these options as effective. However, other entities, like Gauntlet, advocate for freezing the Curve market and taking other actions that Chaos Labs has not proposed. Aave community leader Marc Zeller, has suggested doing very little and coordinating off-chain with the Curve founder to pay down their position. The forum is now a lively debate on how Aave can avoid the worst outcomes of the situation.

Curve is one of the most important protocols to DeFi. In a word, Curve and the CRV token are systemically important. If CRV falls to zero due to a massive liquidation event, many protocols that use it, like Frax and Convex, will also suffer stress and have issues that bleed into other protocols. Aave is also a systemically important protocol and also a protocol where CRV liquidations may occur. The actions Aave takes or doesn’t take could have enormous ramifications for the entire DeFi ecosystem – so I recommend following this one closely.

Pocket’s GANDALF Plan

Pocket Network is discussing altering a single parameter on their network that could drastically change how the protocol operates. Initially, when developers launched the Pocket Network, they set the maximum chain parameter to 15 – meaning that nodes can each support 15 chains. In the proposal’s estimation, putting the chain support so high has centralized the network and caused nodes to focus on the most profitable chains to the detriment of the other chains and the network itself. The proposal recommends setting this parameter to 1. Based on the models in the proposal, setting this parameter to 1 would encourage nodes to decentralize and support other chains. The name for this initiative is Growth Acceleration, Node Decentralization, and Load Fairness [GANDALF].

The proposal has sparked a lively back and forth in the forum regarding some of the data models and conclusions. But as this proposal could drastically change how Pocket Network operates, I recommend following it.

Honorable Mentions

  • Optimism proposes repurposing 2.5M OP tokens to some grant programs. Optimism will issue 1M tokens for experiments, 1M towards protocol builders, and keep 500K as a reserve for future use.
  • Polygon contacts MakerDAO to collaborate on bringing DAI to Polygon’s new zkEVM.
  • Stargate debates deploying their bridge to the L2 Scroll. Scroll is going live sometime in Q3.
  • SuperRare proposes launching RARE staking on Mainnet following a successful Georli testnet deployment.
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