Abracadabra proposes hiking loan interest rate by 200% to manage Curve risk

Apr 07, 2024

The Curve Finance exploit has created a liquidity crisis in the DeFi ecosystem, with several lending protocols rushing to minimize their exposure.

Abracadabra Money, a cross-chain lending platform, has proposed increasing the interest rate on its outstanding loans to manage risks associated with its exposure to Curve DAO (CRV). The proposal drew mixed reactions from the community, with several questioning the modification of loan terms, while others called it a great plan to cut down exposure to CRV.

Abracadabra protocol allows users to earn money by using interest-bearing assets such as CRV, Convex Finance (CVX) and Yearn.finance (YFI) as collateral to mint Magic Internet Money (MIM) — a United States dollar-pegged stablecoin. Spell Token (SPELL) is the native governance and staking token of the Abracadabra platform.

Curve Finance founder Michael Egorov has nearly $100 million in loans across various lending protocols backed by 427.5 million CRV, which is 47% of the total circulating supply of CRV tokens. The Curve founder has 51.65 million CRV collateral and 14 million MIM debt positions on Abracadabra.

Abracadabra is exposed to significant amounts of CRV risk due to recent exploits on the decentralized finance (DeFi) protocol, leading to a liquidity crisis. The incident changed the liquidity conditions that led to the listing of CRV as collateral on Abracadabra.

In order to address the issue, a new proposal has been made to apply collateral-based interest to both CRV cauldrons. Cauldrons allow users to borrow MIM using another asset as collateral, with each cauldron being collateral specific.

The improvement proposal called for an increase in the interest rate to reduce Abracadabra’s total CRV exposure to around $5 million in borrowed MIM.

Related: Ethical hacker retrieves $5.4M for Curve Finance amid exploit

The proposal aims to apply collateral-based interest similar to what the decentralized autonomous organization (DAO) did with the Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH) cauldrons. All interest will be charged directly on the cauldron’s collateral and will immediately move into the protocol’s treasury to increase the reserve factor of the DAO.

The DeFi protocol proposal estimated that for an $18 million principal loan amount, the base rate would be 200%. At this interest rate, the loan would be fully covered within six months. The proposal noted that the base rate would decrease as the principal is repaid.

Voting for the proposal opened on Aug. 1 and will last until Aug. 3, with 99% of the votes cast in favor of the proposal by publication.

The proposal also drew various reactions from the crypto community, including Frax Finance executive Drake Evans who called it a governance rug.

I'm sorry but jacking interest rates to 200% via governance is a rug. Changing the fundamental terms of a loan (10x interest rate) in a single transaction is very bad and we should call it out.Very sympathetic to protecting protocol integrity but rugging is not the way https://t.co/sqWy7R0YPq

Others supported the proposal, claiming it could help the lending protocol eliminate CRV exposure.

If @MIM_Spell really tries this, I'd say there's a good chance $MIM loses all $CRV gauges fairly quickly.41m MIM (61% of total mcap) is on Curve!$SPELL #DeFi https://t.co/vpm3bH4xct

With the price of CRV experiencing a stress test, the risk of a token dump has increased. In the meantime, many lending protocols are looking for ways to clear their CRV exposure.

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