TL;DR Breakdown
- Abracadabra Money has proposed to raise the interest rate on its existing loans by 200% to address potential risks related to its exposure to Curve (CRV).
- The proposal has elicited diverse reactions from the crypto community, with Frax Finance executive Drake Evans referring to it as a “governance rug.”
Description
Abracadabra Money, a cross-blockchain lending platform, has proposed to raise the interest rate on its existing loans to address potential risks related to its exposure to Curve (CRV). This proposal has sparked varied responses within the community, with some expressing concerns about altering loan conditions while others view it as a strategic move to mitigate … Read more
Abracadabra Money, a cross-blockchain lending platform, has proposed to raise the interest rate on its existing loans to address potential risks related to its exposure to Curve (CRV). This proposal has sparked varied responses within the community, with some expressing concerns about altering loan conditions while others view it as a strategic move to mitigate CRV exposure.
Abracadabra loan interest rate could reach 200%
Abracadabra protocol enables users to generate earnings by utilizing interest-bearing assets like CRV, CVX, and YFI as collateral to create Magic Internet Money (MIM), a stablecoin pegged to the USD. Recently, Abracadabra faced significant CRV risk due to exploits on the DeFi protocol, leading to a liquidity crisis. Consequently, the liquidity conditions that previously allowed CRV to be listed as collateral on Abracadabra were altered.
A new proposal has emerged to tackle this issue, suggesting applying collateral-based interest to CRV cauldrons and liquidity pools within the lending protocol. The proposal aims to raise the interest rate to reduce Abracadabra’s overall CRV exposure to approximately $5 million in borrowed MIM.
The proposal seeks to implement collateral-based interest, drawing inspiration from the decentralized autonomous organization’s approach with the WBTC and WETH cauldrons. Under this plan, all interest will be directly charged on the cauldron’s collateral and swiftly transferred to the protocol’s treasury, thereby bolstering the DAO’s reserve factor.
According to the DeFi protocol’s proposal, for a principal loan amount of $18 million, the base rate would stand at 200%. This interest rate is projected to cover the loan within six months fully. The proposal also highlights that the base rate will gradually decrease as the principal amount gets repaid.
The voting for the proposal commenced on August 1 and will continue until August 3. Notably, an overwhelming majority of 99% of the votes have been cast in favor of the proposal. Upon the conclusion of the 46-hour voting period, if the proposal is successfully passed, the new CRV interest rates will be immediately implemented for both CRV cauldrons within the Abracadabra protocol.
Abracadabra’s proposal met with criticism
The proposal has elicited diverse reactions from the crypto community, with Frax Finance executive Drake Evans referring to it as a “governance rug.” He expressed concerns over the significant increase in interest rates (up to 200%) through governance, stating that such drastic changes in loan terms within a single transaction are unfavorable and should be criticized. While he acknowledges the importance of safeguarding the protocol’s integrity, he believes that “rugging” is not the right approach.
Another user, yMoon, expressed that the proposal could be self-harming for the Abracadabra protocol. The user believes that implementing higher interest rates and forcing the liquidation of assets might have severe implications for all participants involved. Instead, yMoon emphasizes the importance of cooperation and working together to find solutions that benefit the community.
On the other hand, some community members have supported the proposal, asserting that it could assist the lending protocol in reducing its exposure to CRV. One user, DeFi Moon, speculates that if the project implements the proposed changes, it may lead to a rapid withdrawal of $CRV gauges, and a significant portion of MIM (around 41 million MIM, constituting 61% of the total market cap) could be withdrawn from Curve due to the adjusted interest rates.
The significant amount of loans held by Curve founder Michael Egorov, totalling nearly $100 million across different lending protocols, is backed by a substantial 427.5 million CRV tokens, representing 47% of the circulating supply of the Curve token. Additionally, Egorov has 51.65 million CRV tokens utilized as collateral and 14 million MIM debt positions on Abracadabra.
Due to the recent fluctuation on the price of CRV, there is a heightened risk of a token dump, which could lead to a sudden and significant decrease in the token’s value. As a result, many lending protocols, including Abracadabra, are actively seeking ways to reduce their exposure to CRV to mitigate potential losses and protect their stability in the market.
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