A proposed rate hike has been set forth by Abracadabra Money, a cross-blockchain lending platform, to counterbalance risks associated with its Curve (CRV) exposure. They aim to increase their outstanding loan interest rate by a staggering 200%. Divergent reactions have followed within the crypto community.
Abracadabra enables users to earn profits from interest-bearing assets such as CRV, CVX and YFI. These assets act as collateral to mint Magic Internet Money (MIM), a USD-pegged stablecoin. Recent exploits on the DeFi protocol have exposed Abracadabra to considerable CRV risk, leading to a liquidity crisis. This situation has stirred a rethink of the liquidity conditions that originally led to the listing of CRV as collateral on Abracadabra.
In response to these conditions, a new initiative would apply collateral-based interest to both CRV cauldrons. Base rate would increase to the tune of 200%, significantly reducing Abracadabra’s total CRV exposure to approximately $5 million borrowed MIM within six months. This adjustment will be directly applied to the cauldron’s collateral and automatically incorporated into the protocol’s treasury to enhance the reserve factor of the DAO.
Following the announcement, voting opened for the proposal and saw a staggering 99% of votes cast in favor. While reactions within the crypto community have been mixed, Frax Finance executive Drake Evans labeled the move a governance rug, implying a significant change in existing administrative policies. Conversely, other supporters argue that it could assist the lending protocol in shedding its CRV exposure.
With Curve founder Michael Egorov holding nearly $100 million in loans across various lending protocols and backed by 47% of the circulating supply of CRV tokens, a price stress test is a looming possibility. Such a stress could provoke a significant token dump, leaving lending protocols scrambling to disentangle themselves from their CRV exposure.
Nonetheless, increasing interest rates alone seems an abrupt solution to a complex problem. Is the community justified in supporting the stringent rate hike, or will this decision provoke a counterblast? As shifts in blockchain lending protocol continue to make waves, the crypto community must be prepared for the potential long-term ramifications of these swift policy changes.
Source: Cointelegraph
