A June 12 AAVE (AAVE) proposal to prevent a particular account from accumulating more debt has sparked controversy, with some participants claiming the proposal violates the principle of censorship resistance or “neutrality” in the decentralized finance, or DeFi.
Some participants believe the account belongs to Curve (CRV) founder Michael Egorov. Cointelegraph was unable to independently confirm who owns the account.
Uhh looks like the Curve founder has a leveraged position of $110 million against his $CRV stack on all Defi.
If it’s not repaid at some point (spoiler: it probably won’t be, my man is profiting from it) it will turn into a lot of bad debt for loan protocols https://t.co /kxwc0Sk65V pic.twitter.com/yhHp9JFWBV
— steam (@trading_vapor) June 14, 2023
According to the author of the proposal, financial modeling platform Gauntlet, Ethereum address 0x7a16ff8270133f063aab6c9977183d9e72835428 has accrued $67.7 million in US Dollar (USDC) and Tether (USDT) debt through the AAVE V2 protocol using $185 million in Curve tokens as collateral.
Gauntlet expressed concerns that this account could continue to increase in debt, putting it at risk of being liquidated in the event of a sudden drop in Curve’s price. According to Gauntlet, the problem is compounded by the fact that CRV has suffered a drop in liquidity over the past few months. This can lead to slippage if the account is liquidated, as there may not be enough CRV buyers in the market willing to accept such a large amount of tokens.
This could result in millions of dollars in bad debt for AAVE, Gauntlet suggested.
AAVE user DecentMuse claimed that the wallet address “is labeled as belonging to the founder of Curve”, indicating that it may belong to Egorov. In DecentMuse’s view, the loan may represent a way for the founder to profit from his entrepreneurial activities on behalf of Curve. Cointelegraph was unable to confirm the identity of the owner of the address.
In the proposal, Gauntlet suggested that the AAVE Decentralized Autonomous Organization (AAVE DAO) should implement a fix to freeze any further use of CRV as collateral for loans. This would allow the account to continue to hold its current loan position, but also prevent it from accumulating new debt.
Related: A bug in Aave v2 on Polygon causes some assets to hang in contracts
Some forum participants supported the proposal and criticized the account for accumulating so much debt. For example, a user who uses the nickname “AAVEBull” allegedly claimed that the account must not have any intention of paying off its debts, as it has continuously added to its position as the price of the token has fallen.
In response, critics of the proposal defended the account. For example, user prie.eth stated that the account owner may simply believe that CRV tokens are drastically undervalued; leading them to believe that as the price drops, it makes sense to increase their use as collateral.
Aave-Chan Initiative (ACI) founder Marc Zeller, who frequently attends the forums, also weighed in on the proposal. He said the AAVE DAO should be careful not to violate “the core ethics of DeFi, which is neutrality.” “The intent of users or what they do with their funds is not our primary concern,” Zeller said, adding that “users should be free to use the protocol as they see fit.”
The proposal is listed as a “recommendation” as of June 16. This means that it has not yet been turned into a formal AAVE Improvement Proposal (AIP) on which the DAO can vote. The author said turning it into a formal AIP is the “next step” of the proposal.
Participants in the blockchain ecosystem continue to debate the limits of censorship resistance. In January, many Bitcoin users complained about high fees caused by other users minting and trading ordinals. Some users wanted to ban ordinals, while others saw a ban as censorship.
On April 11, Tether blacklisted an address that had drained $25 million from leading EVM bots. Polygon co-founder Jaynti Kanani said the blacklist set “a bad precedent” that could lead to more transactions being censored, while on-chain sleuth ZachXBT claimed Tether may have -being coerced into engaging in the act due to a court order.
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