Abracadabra Protocol To Counter CRV Risk With 200% Interest Rate Hike

DeFi lending protocol, Abracadabra Money, is currently debating a proposal to boost the interest rate in its CRV lending markets as it looks to mitigate its exposure to the DeFi token. 

In the last few days, CRV  has seen its value decline significantly due to the recent Curve Finance exploit on Sunday, which resulted in a total loss of over $60 million. According to data from CoinMarketCap, CRV is currently trading at $0.56, with an 8.28% loss in the last 24 hours.

Abracadabra Exposed To Significant CRV Risk Levels

In a governance proposal submitted on Aug 1, DAO contributor and community manager Romy highlighted that Abracadabra was currently exposed to a substantial level of CRV risk.

To address this situation, the proposal contains a strategy that introduces collateral-based interest to both CRV cauldrons – lending markets – on Abracadabra.

Related Reading: Ethereum DeFi Coins Plunge As Curve Concerns Threaten Major Market Crash

Romy stated that Curve Finance, the underlying platform of CRV, has seen its TVL negatively affected over the last month by several events, including the Conic Finance Hack, the JPEG’d exploit, and the attack on Curve itself. 

In particular, Romy noted that the theft of $25 million from Curve’s CRV/ETH pool had impacted the on-chain liquidity for CRV, altering the conditions that led to the adoption of the token as a collateral asset on Abracadabra. 

In addition, the proposal also noted that Abracadabra had recorded CRV outflows toward markets with lower Loan-to-Value (LTV) ratios and higher interest rates. Together, all these factors have affected CRV’s price and liquidity, prompting the need for Abracadabra to reduce its exposure to the token.

CRV trading at $0.558 on the daily chart: Source: CRVUSD chart on Tradingview.com

Abracadabra’s Proposed Strategy To Introduce 200% Interest Hike

As earlier stated, Romy’s governance proposal aims to cover Abracadabra CRV’s risk by applying collateral-based interest to the two CRV lending markets on the platform. It was stated that this strategy had been previously implemented with the WBTC and WETH cauldrons. 

This introduction of collateral-based interests would allow Abracadabra to levy interest directly on each CRV cauldron’s collateral which is directly transferred to the protocol’s treasury and converted to Abracardra’s native stablecoin MIM, either via on-chain or off-chain transactions. 

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Based on projections, Romy stated that this strategy would allow Abracadabra to boost its treasury reserve and cut potential losses due to CRV exposure to about $5M borrowed MIM. 

Under the new proposed interest structure, the interest rates will be determined based on two factors: the combined outstanding principal of the CRV cauldrons and the collateral ratio of each cauldron. 

The base interest rate will vary depending on the total borrowed amount, classified into three ranges: $0M-$5M, $5M-$10M, and $10M-$18M. For instance, as the current outstanding principal stands at $18M, the base interest rate would be set at 200%. 

Using this rate, it is estimated that the loan would be completely covered in six months’ time. Furthermore, the collateral ratio would influence the interest multiplier, with ratios ranging from <= 40% to <= 70% correlating to multipliers of 1x, 5x, 10x, and 25x, respectively.  

According to the proposal, this interest rate structure ensures the maximum chances of “full principal recovery” for Abracadabra.

The voting session for this proposal commenced on Aug. 1. and will run for only 46 hours due to the supposed urgency of the matter. As of the time of writing, 51 members of the Abracadabra DAO have placed their votes, with 99.74% supporting the proposal. 

Source: Snapshot

Featured image from Ceqoa, chart from Tradingview