CRV - A possible liquidity Crunch?
The following analysis is done by @Pierandrea21 (https://twitter.com/Pierandrea21). Telegram: @pierandrear TWITTER THREAD AT https://twitter.com/Pierandrea21/status/1669470856764899328
References:
- Gauntlet recommendation to freeze CRV and set CRV LTV -> 0 on Aave v2 (https://governance.aave.com/t/gauntlet-recommendation-to-freeze-crv-and-set-crv-ltv-0-on-aave-v2/13644)
- Gauntlet advises Aave community to freeze CRV tokens in response to loan by Curve Finance founder (https://governance.aave.com/t/gauntlet-recommendation-to-freeze-crv-and-set-crv-ltv-0-on-aave-v2/13644/1)
- Michael Egorov address (https://debank.com/profile/0x7a16ff8270133f063aab6c9977183d9e72835428)
Michael Egorov, the founder of Curve, has made a deposit of 288 million CRV tokens (equivalent to $180 million) into AAVE V2.
This deposit represents over 30% of the overall circulating supply of CRV tokens.
Micheal used the CRV as collateral to borrow through AAVE a total of $61m. Is important to know that the Max Loan To Value for using CRV as Collateral is 55% on AAVE.
In the event that the price of CRV reaches $0.37, a price change of approximately 64% from the current value as of June 15th, Michael's collateral (285m of CRV) could potentially face liquidation.
However, it is crucial to consider the current liquidity landscape of CRV on decentralized exchanges, as it presents significant implications for this scenario.
According to Gauntlet, there has been a significant decline in CRV token liquidity, both on-chain and globally, with a decrease of 50% over the past few months.
This reduction in liquidity raises concerns about the ability to absorb potential collateral liquidation, specifically in the case of Michael's USDT loan. If there is insufficient liquidity, AAVE may face challenges in effectively liquidating Michael's position.

Gauntlet suggested freezing CRV on Aave v2, so the project can incentivize the loan holder to either reduce borrowing or diversify collateral forms. The goal is to prevent Aave from accruing bad debt due to the declining liquidity of CRV tokens on exchanges. Specifically, Gauntlet claimed the concern is over the decrease in the liquidity of the CRV token, which has gone down in the last few months. Gauntlet clarified that it does not support restricting any specific address. Instead, a CRV freeze would encourage the migration of the aforementioned loan position to Aave version 3, which is designed for better risk management. “We propose freezing CRV on Aave V2 to encourage migration to V3, where risk parameters are better suited for this market,” Gauntlet said. “Given the account is actively managed and frequently maintains its health, freezing CRV will incentivize the account to reduce its borrow or add other forms of collateral,” Gauntlet stated in its proposal. Despite the loan account maintaining a health factor of 1.6 for its loan, indicating no immediate bad debt risk to Aave. Nevertheless, Gauntlet stressed that if the address continues to use CRV as collateral, it could pose future risks, especially considering the recent reduction in CRV liquidity.
Michael Egorov, the founder of Curve Finance, said: “The proposal seems to suggest changing the LTV to zero while maintaining the liquidation threshold at exactly the same level as before. This change would prevent any increase in the loan or the collateral, necessitating the use of Aave v3 (which is capped) if additional collateral is required,” Egorov explained. "Regardless, it’s better to be a bit more careful with this position on Aave. Even if proposal gets rejected, it’s better for me to act as if it was executed," Egorov added.
Meanwhile, other contributors to Aave have commented that executing Gauntlet's proposal might not be beneficial for Aave and could potentially conflict with the ethos of decentralized finance. Among them was Aave-Chan Initiative founder Marc Zeller, who said, “Firstly, it’s important to remember the core ethos of DeFi, which is neutrality. The protocol should function effectively regardless of whether a pool has one large position or a thousand smaller ones with similar liquidation ranges.” He added, “Secondly, we need to be cautious about implementing ‘solutions’ that could potentially do more harm than good.”