CRV and Insuring Risks in DEFI
A couple of days ago the CRV protocol — one of the oldest and most respected in DEFI was hacked for a meagre $62 million. It’s not that much in the context of the current total value locked in DEFI (around $50 billion). But, since the space is so interconnected, there is potential fallout.
Michael Egrov the founder of curve holds around 48% of the total supply of CRV; which is a large position by any standing and had at least some of the CRV in AAVE (another DEFI protocol) as collateral against a $100million loan.
The Curve hack caused the price of CRV to fall and, in turn, the value of the collateral to fall, which has the potential to trigger an automatic liquidation worth around $100 million on AAVE which will in turn cause the price of CRV to fall further.
Butterfly Effects
It’s these butterfly effects that make it difficult to model risk in DEFI. The speed at which a death spiral can be created and propagated is phenomenal and one potential end result is that things could fall apart — like they did with Luna, despite our best intentions and our best efforts.
This is where DEFI needs insurance, hacks are part of the DEFI risk vector and singular events (like the CRV hack) can spread risk through the interconnectedness of different protocols. Positions get liquidated, prices fall, and the spiral continues. There has to be something, or someone, that absorbs the downside risk with a pool of slow-long term capital that can bounce back over the long term.
DEFI doesn’t need more death spirals, it needs insurance. If DEFI is going to scale, we’re going to have to handle risk better. And, that’s what we’re building at Plural.
