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I recently read the [Kaiko research piece](https://research.kaiko.com/insights/crv-aave-liquidation) about Egorov, the founder of Curve, and his borrowing strategy. If you're not familiar with it, I highly encourage you to take a look.

Currently, Egorov is borrowing approximately $66M from Aave, $20M from Abracadabra, $13M from Frax, and $7M from Inverse Finance. In my opinion, the protocol severely underestimates the risk posed by these two cauldrons. Last week, an Aave governance proposal was created to limit CRV contagion, but fortunately, the proposal failed to pass. While the position is still overcollateralized, we need to formulate a response to reduce protocol risk and encourage Egorov to repay his positions.

Before we dive in, I think it’s important to acknowledge that the 18% APY on the CRV cauldrons meaningfully contributes to the protocol's profitability. However, the DAO faces asymmetric downside risk (similar to what we saw with UST), which could have catastrophic consequences in the event of cascading liquidations on CRV.

Egorov’s Aave borrow position can be seen below:


The Good, the Bad, and the Ugly
-------------------------------

The Aave forum and CT point out that Egorov has remained a responsible borrower by consistently collateralizing with more CRV, even as its price continues to decline. However, I would argue that the spot markets are significantly overvaluing CRV, considering Egorov's borrow positions. The CRV used as collateral on Aave, Frax, and Abracadabra alone accounts for nearly 50% of CRV's total outstanding supply.


There are several indications that a liquidation would prove to be fatal to the Abracadabra protocol. According to Curve’s own DEX front-end, a 10M CRV swap (equivalent to approximately $6.7M at spot prices) is expected to cause a 30% price impact on Curve's own DEX. Currently, Abracadabra holds ten times that amount (~100M CRV) and Aave holds twenty-eight times that amount (~285M CRV). Furthermore, the gigabrains over at Gauntlet conducted their own simulations and are estimating that the markets would struggle to support even a $6M liquidation. It seems incredibly unlikely that Abracadabra would be able to liquidate the full CRV position without incurring significant amounts of bad debt. 


Next Steps
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The DAO should be hyper-focused on ensuring that Egorov acts responsibly and closes his Abra borrow positions. I remain hopeful that he is utilizing these borrows for farming purposes rather than making extravagant purchases like his [McMansion in Australia](https://www.theblock.co/post/232464/curve-finance-ceo-michael-egorov-wife-mansions-australia). The [Aave forum post](https://governance.aave.com/t/gauntlet-recommendation-to-freeze-crv-and-set-crv-ltv-0-on-aave-v2/13644/33) provides insightful analysis on the outstanding positions and suggests punitive measures that can be implemented. Thankfully, the Abracadabra contracts, in some ways, allow for greater flexibility than Aave. Below are several options that we should discuss as a DAO and consider implementing:

- Increase the interest rate of the cauldron

- To incentivize Egorov to pay off the Abracadabra loan more quickly and appropriately compensate for his risky borrowing behavior, we can continuously raise the interest beyond 18%. I suggest increasing the interest rate to 30% initially, followed by a weekly increment of 5% thereafter.

- Aave, unfortunately, cannot simply raise the variable borrow fee of the USDT stablecoin without affecting other non-Egorov borrowers. This puts Abracadabra at a significant advantage, as we can exclusively penalize Egorov.

- Decrease the LTV of the cauldron

- Gradually reducing the Loan-to-Value (LTV) of the cauldron would enable Abracadabra to liquidate the CRV while sufficient liquidity remains in the market.

- Aave is unable to liquidate the CRV borrow position due to their substantial $65M borrow position, which would result in significant losses. On the other hand, Abracadabra can swiftly take action and potentially recover 75% or more of the CRV position.

Looking forward to rich discussion around these points!

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