Interest rate mechanics

Junior · enrolled learners

This lesson opens with Michael Egorov's CRV-backed loans, July and August 2023.

What happened

Curve's founder had borrowed more than $100M of stablecoins against roughly 460 million CRV, the largest pieces being 63.2 million USDT on Aave and 15.8 million FRAX on Fraxlend against 59 million CRV, with further loans on Abracadabra and Inverse Finance. On 30 July 2023 a faulty reentrancy lock in some versions of the Vyper compiler was used to drain several Curve pools, about $62M gross across four pools by Curve's own post-mortem, and CRV fell more than 20 percent, to about $0.58 by 3 August. The positions came under pressure from both directions at once. The collateral was falling, and on Fraxlend, as lenders withdrew FRAX for fear of bad debt, utilization sat at 100 percent and the borrow rate, which under Fraxlend's rules doubles every twelve hours at full utilization, passed 80 percent a year and was reported as able to reach 10,000 percent within days. Egorov sold CRV in private over-the-counter deals at about 40 cents while it traded near 58, raising more than $42M by 10 August, and seeded a new Curve pool with CRV rewards to draw lenders back to the Fraxlend market. Aave governance later froze CRV on its v2 Ethereum market.

The decision point

The position was never liquidated in the way J304-02 describes. It was resolved by the borrower selling collateral privately at prices he did not choose, under a deadline set as much by an interest rate as by a price. That is the mechanism this lesson exists to make visible: a utilization curve is not a fee schedule, it is a clock, and it runs faster exactly when everyone else is trying to leave.

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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