Curve Finance recently faced a hacking attempt that tested its soft liquidation mechanism, LLAMMA.
Despite LLAMMA’s success in managing the situation, the CRV token’s price plummeted by over 28%, causing alarm within the decentralised finance (DeFi) community.
Curve Finance founder Michael Egorov is facing liquidation risk as his leveraged positions in CRV have begun to be liquidated due to the token’s sharp decline. Egorov had borrowed $95.7 million in stablecoins, primarily crvUSD, across five different accounts and protocols, using $141 million worth of CRV as collateral.
On-chain data revealed that Egorov made multiple attempts to manage his debt positions, executing several liquidations and engaging in repayments and withdrawals from DeFi platforms like Inverse Finance and Curve.fi.
Commenting on the incident, Egorov noted:
“The system showed a fantastic performance. This gave time for liquidators to prepare funds and OTC-liquidate the hacker’s position. As a result, the system has no hacker’s funds left, no bad debts, everything operates well. I didn’t think that I will see this aspect tested by real life so soon, but it just appears that we have built something incredible.”
Crypto community members shared varying views on the situation, with Ethereum and CryptoPunks OG, @econoar, tweeting to clarify that Egorov’s liquidation didn’t translate to him getting ‘rekt’.
Michael did not get “rekt” by being liquidated on his CRV.
He got $100mn in stables out of a $140mn CRV position.
Selling it on market would have resulted in similar prices and a pissed community.
Sure, coulda done it at the defi top and made out better but still…
— eric.eth (@econoar) June 13, 2024
LLAMMA, which stands for Lending-Liquidating Automated Market Maker Algorithm, includes a soft liquidation mechanism designed to handle liquidations without resulting in unpayable or unprofitable debt.
According to the LLAMMA documentation, when a loan is initiated, the collateral is divided into multiple bands within the automated market maker (AMM).
“Unlike regular liquidation, which has a single liquidation price, LLAMMA has multiple liquidation ranges (represented by the bands) and continuously liquidates the collateral if needed.”
This structure allows for continuous liquidation of collateral as needed, unlike regular liquidation, which has a single price point.
The documentation notes that during soft liquidation or de-liquidation, positions suffer losses from the buying and selling of collateral, which can affect the health of the loan. If a position’s health reaches 0%, it may undergo a hard liquidation, effectively closing the loan.
“If the position is not in soft liquidation, no losses occur. These losses decrease the health of the loan. Once a user’s health is at 0%, the user’s position may face a hard liquidation, which closes the loan.”
Despite LLAMMA functioning as intended, the market responded negatively, resulting in a CRV price drop of over 28% in 24 hours.
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