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A notorious market manipulator, responsible for last month’s attack on Mango Markets, yesterday attempted to crash the price of DeFi exchange Curve’s CRV token.
DeFi users tracked his movements on-chain. They rallied around the token, pumping the price by over 40% and leading to Eisenberg’s short position being liquidated. However, DeFi lending protocol Aave was left with 2.64 million CRV (worth approximately $1.6 million) in bad debt upon liquidating the collateral.
1/6 We want to address the cycle of liquidations that occurred in the CRV pool on the Aave Protocol today. The liquidations were successful (and worked as designed), but unfortunately, the size of the position left some excess debt within the protocol.
— Aave (@AaveAave) November 22, 2022
The strategy involved building up a hefty short position on Aave, borrowing a total of 92 million CRV against 57 million USDC collateral over the last few days. Then 20 million CRV was transferred to OKEx exchange and it was presumably dumped — shortly after, the price began a rapid descent.
It appeared that Eisenberg was targeting the liquidation of Curve founder Michael Egorov’s large long position, also on Aave. At a CRV price of $0.26, this position would be automatically liquidated by Aave, selling the CRV collateral, pushing the price further down and further boosting the short’s profitability.
Strategies like this work when on-chain liquidity is low. Lending protocols such as Aave and Compound tend to limit the assets accepted as collateral in order to reduce the potential for the type of extreme price manipulations that allowed Eisenberg to drain Mango Markets.
DeFi protocol AAVE faces bad debt and centralized points of failure
Read more: Here’s how three DeFi protocols lost $115M in one day
However, CRV’s main use is to be locked in exchange for governance rights on Curve, and much of the supply is locked for long periods as veCRV. This, combined with the recent liquidity crunch brought on by the collapse of FTX, led to lowered liquidity, making the trade theoretically possible.
Curve is an important protocol in DeFi, however, and many whales with deep pockets have an interest in maintaining a healthy CRV price. In response to the attack, CRV began to be bought up and the price began to recover quickly.
The release of a whitepaper for Curve’s upcoming stablecoin, crvUSD, may have further boosted the price, which reached $0.72, far above the $0.64 at which Eisenberg’s short position began to be liquidated.
As it became clear the bet wasn’t going to play out as he’d hoped, Eisenberg took to Twitter to say he would be “Taking the day off to spend time with family.” One of his liquidators subsequently left a message via Etherscan transaction input data that read, “We shall go always a little further… Mango sends it (sic) regards.”
Eisenberg, also known by his Ethereum address ponzishorter.eth, warned last month of the potential to manipulate prices of Aave collateral assets with low on-chain liquidity. In the example, he outlines a similar strategy using REN token:
I've been advised aave is perfectly safe so here's the potential trading strategy. Not financial or legal advice, but if you do make 9 figures on this feel free to send a tip
— Avraham Eisenberg (@avi_eisen) October 19, 2022
Note that starting with more initial capital increases success odds and profit percentage pic.twitter.com/HKAF7Y5ogM
While the damage to Aave is relatively small (Aave v2 bad debt is less than 0.1% of TVL according to RiskDAO’s dashboard), there has been some discussion as to whether the protocol could have adjusted lending parameters to avoid this result.
Liquidating large positions in a relatively illiquid asset can lead to heavy slippage when swapping the collateral asset to repay lenders. A discussion on whether to freeze or adjust LTV parameters for certain, currently volatile, collateral assets is ongoing.
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