GM, this is your Daily Bolt briefing
In today’s edition, we’ll be giving you our notes from Frax Founder Sam Kazemian as he shares his thoughts on the Curve Finance exploit, how Fraxlend performed during the fiasco, innovation in DeFi lending, and more.
Also; tune in to tommorow’s episode of ‘The Macro Show’, featuring Nick Drakon as he discusses the state of the global economy as it relates to crypto prices, capital inflows, and more.
Stay alert, stay informed ⬇
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1/ Unchained Podcast - Sam Kazemian on Curve Hack
Preview: Laura Shin and Sam Kazemian discuss Curve hack, Vyper, Fraxlend, and innovation in DeFi lending markets. Click here to listen to the full episode (39 mins).
Read our Note (4 mins) and save 35 mins.
Curve Hack Explanation
Sam says that a small hack occurred on some pools on Curve Finance. The exploit was a compiler-level bug, not a typical smart contract error. Unlike typical vulnerabilities caused by coding errors, this bug affected how code was compiled into bytecode for execution on Ethereum Virtual Machine (EVM).
He says that the bug affected specific versions of the Vyper compiler used by Curve. The bug caused an incorrect compilation of code, leading to potential vulnerabilities in token accounting. The issue was discovered by the Curve developers and others but they were not able to prevent all funds from being drained before fixing it.
He adds that Alchemix pools and other affected pools were at risk of having their funds drained due to incorrect token accounting. Some funds were returned by white hat addresses that helped mitigate the damage caused by the exploit.
Sam says that prior to the exploit, there were some loans that raised concerns among users. Discussions on governance forums questioned whether these loans were too large or if parameters needed to be adjusted. However, there was no indication of a severe problem or imminent implosion.
Impact on Vyper Compiler
Sam says that Vyper is not as widely used as Solidity, so its developer community and resources are relatively smaller. The Vyper compiler, responsible for compiling Vyper code into EVM bytecode, has fewer resources compared to the Solidity compiler. This bug exposed a vulnerability in specific versions of Vyper, highlighting the need for more attention and resources for its development and maintenance.
Time-dependent Interest Rates in Fraxlend
Sam says that Fraxlend has a unique feature where interest rates are not only based on utilization but also time-dependent. If utilization exceeds a certain threshold, interest rates will double every 12 hours or "Half-Life". The dynamic nature of these interest rates allows borrowers to react based on their affordability and lenders to benefit from higher interest rates.
He says that in the chaotic situation, lenders in the CRV-FRAX pair rushed to retrieve their FRAX stablecoins. They wanted to avoid the potential liquidation of CRV tokens that might not be sufficient to buy back enough $FRAX. This rush caused the interest rates for $CRV borrowers, primarily Michael (founder of Curve Finance who had a $CRV collateral loan on Fraxlend), to double every 12 hours. The interest rate started relatively low (around 10%) but quickly escalated due to the doubling mechanism.
Resolution: Repayment and OTC Deals
Sam says that to resolve the situation, Michael had to repay some of the debt on Fraxlend and other platforms. Notably, there was a large over-the-counter (OTC) deals where Michael sold some of his $CRV tokens to prominent individuals in the space, including Justin Sun and Machi Big Brother. The debt was paid down to reduce the utilization rate on the Fraxlend pair and prevent further interest rate doubling.
Importance of Innovation in Lending Markets
Sam says that traditional lending markets lack innovation. Fraxlend aims to bring innovation to lending markets. Dynamic debt restructuring ensures that bad debt is socialized, preventing individuals from losing out if there is a liquidation that doesn't cover everyone's debt. New features and innovations are crucial to avoid similar situations in the future.
He adds that there are new generation DeFi lending protocols, such as Oracleless lending protocols, that aim to be more autonomous and efficient. The goal is to have more DeFi platforms like Uniswap that work autonomously on both the lending side and the stablecoin side.
He says that current solutions often require manual intervention through Zoom meetings or governance votes on forums. More DeFi platforms should be autonomous like Uniswap, both on the lending side and stablecoin side. Automation reduces reliance on human decision-making processes and makes operations more efficient.
Our friends at Dynamo Defi publish an extremely useful newsletter called Chain Catalyst which we read weekly.
Dynamo DeFi is a weekly newsletter that covers the latest web3 products, strategies, and trends.
If you are actively operating, trading or working in DeFi, this newsletter is a must!
Sign up for the free newsletter here -