Cryptocurrency Curve’s CRV token continues to lose ground as traders pile into short positions due to the looming threat of potential large liquidation of the founder’s borrowed position. Early Tuesday, the cryptocurrency fell below 50 cents, reaching the lowest since Nov. 22, according to market data. Prices are down roughly 30% since Curve fell victim to a reentrancy attack late Sunday.
The notional open interest in perpetual futures tied to CRV has doubled to $106 million alongside deeply negative funding rates, according to data source Velo. This is generally a sign of traders shorting or betting on a price decline. The bearish positioning likely stems from fears that the potential liquidation of Curve founder Michael Egorov’s large borrowing positions on Aave and Frax may destabilize Curve and the wider crypto market.
Crypto analytics firm Delphi Digital tweeted that Egorov has borrowed 63.2 million tether (USDT) from decentralized lender Aave against collateral of 305 million CRV. The position will be liquidated if CRV/USDT pair drops to $0.37. Egorov also supplied 59 million CRV to Fraxlend as collateral backing the 15.8 million FRAX loan. This borrowing is smaller than the USDT loan, but poses a bigger risk to CRV due to Fraxlend’s Time-Weighted Variable Interest Rate.
Delphi Digital explained that Frax’s time-weighted variable interest rate adjusts the interest rate up or down over time based on whether the utilization rate or the ratio of borrowed assets to collateral supplied is above or below a specified target range. At 100% utilization, the interest rate can double every 12 hours and can reach a maximum of nearly 10,000% APY after just 3.5 days. This could lead to Egorov’s eventual liquidation, regardless of CRV price, and create volatility in the wider decentralized finance ecosystem.
Despite the bearish positioning, there is potential for a short squeeze if and when concerns about Egorov’s loan subside. A short squeeze is a rapid move higher driven by bears abandoning their bearish bets. For a short squeeze to occur, the market needs to have a higher-than-usual bearish activity, as indicated by CRV’s deeply negative funding rates.