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News/USDT Depegging Sparks Concerns; Curve Founder Addresses On-Chain Debt

USDT Depegging Sparks Concerns; Curve Founder Addresses On-Chain Debt

Jun 15 2023

last year3 minutes read

Censorship Resistance Debate: Curve Founder's Debt and USDT Depegging Incident Impact Aave

Written by Van

The decentralized finance (DeFi) ecosystem has recently witnessed a heated debate surrounding issues of censorship resistance and stablecoin depegging. One particular incident involves Curve FinanceAave, and the accumulation of debt by Curve's founder, Michael Egorov. Additionally, the depegging of Tether's stablecoin (USDT) on Curve's decentralized exchange has raised concerns among market participants. 

Curve Founder's Debt and Aave's Proposal


The controversy began when Gauntlet, a risk and simulation platform, proposed a patch to prevent an account associated with Curve's founder, Michael Egorov, from accumulating further debt in the Aave v2 protocol. This account, identified by the Ethereum address 0x7a, had already accumulated a substantial debt of $67.7 million using USD Coin (USDC) and Tether (USDT) as collateral at that time.

Concerns emerged that the debt held by this account could increase, potentially leading to liquidation if Curve's price experienced a sudden decline. Gauntlet warned that Aave could face significant losses if the account were to be liquidated due to the declining liquidity of Curve tokens (CRV). As a result, Aave DAO was urged to implement a patch freezing CRV tokens as collateral for loans.

Debate on Censorship Resistance in DeFi

The community response to Gauntlet's proposal was mixed, leading to a debate on the concept of censorship resistance in the DeFi space. Some participants supported the proposal, criticizing the account for accumulating excessive debt. On the other hand, others defended the account, suggesting that the owner may view CRV tokens as undervalued, justifying their increased use as collateral.

Marc Zeller, the founder of the Aave-Chan Initiative, cautioned against violating the core ethos of DeFi, emphasizing the importance of user freedom in utilizing the protocol. Zeller stated that the intention of users or their actions with their funds should not be the primary concern, as users should be free to utilize the protocol as they see fit.

USDT Depegging and Market Impact

Another significant event that added fuel to the debate was the depegging of Tether's stablecoin, USDT, on Curve's decentralized exchange. Tether, with an $83 billion market cap, deviated slightly from its peg to the US dollar. The price of USDT fell by 0.3% to around 0.997, leading to an increase in its weightage in Curve's 3pool to over 70%, significantly higher than the usual 33.1% on June 15.

Source: PeckShield/ Twitter

This imbalance in stablecoin weights raised concerns among market participants, as traders started selling USDT for alternatives like DAI or USDC. The situation reminded some observers of previous incidents, such as Terra's implosion and the collapse of FTX, where similar imbalances caused market instability. One of the main factors contributing to the imbalance was attributed to a whale address named CZSamSun.

Trader Activity and Impact on Aave

Traders swiftly seized the arbitrage opportunity presented by the USDT depegging incident. One Ethereum address, czsamsun.eth, borrowed $31.5 million USDT from Aave v2 and exchanged it for 31.47 million USDC on Curve at a rate of $0.997. Another address, 0xd2, deposited 52,200 staked Ether (stETH) through Aave v2, borrowing $50 million USDC by capitalizing on the USDT/USDC price difference.

AAVE's algorithmic model responded to the sudden demand for USDT loans by adjusting rates, causing the deposit rate to surge to over 15% and the borrowing rate to increase by more than 25%.

Source: Lookonchain/ Twitter

Tether's Response and Stablecoin Depegging

In response to the USDT depegging incident, Tether's Chief Technical Officer (CTO), Paolo Ardoino, reassured the crypto community that it was not a cause for concern. Ardoino affirmed that Tether is ready to redeem any amount and even shared a "FUD meme" to address the market rumors surrounding Tether's depeg. 

Source: Paolo Ardoino/ Twitter

Some members of the community think that the current movement is only temporary, including crypto investor Scott Melker. He explained that the stability of a stablecoin is not based on its price on an exchange, but rather on the ability to redeem it for its original value from the source. Despite this, some crypto users continued to criticize the way Ardoino responded, considering it insufficient to alleviate concerns.

Previous Stablecoin Depegging Incidents

The USDT depegging incident is not the first time the stablecoin market has experienced instability. Just a few months prior, there was a depegging incident involving USD Coin (USDC), which caused turmoil in many investors' portfolios. 

USDC depegged below $0.90 in March as Circle, the issuer of USDC, confirmed it had over $3 billion stuck with Silicon Valley Bank. Although Circle managed to restore the peg to the dollar within two days, the panic triggered by the depegging led to numerous traders exiting USDC at a loss.

Curve Founder's Debt Repayment

Amidst the debates and concerns, Michael Egorov, the founder of Curve Finance, took proactive measures to reduce his on-chain debt. Egorov returned $1.35 million USDT to Aave, aiming to mitigate the risk of liquidation associated with his loan position on the platform. However, even after the repayment, Egorov's loan position, backed by 288.8 million Curve DAO (CRV) tokens worth more than $174 million, still carried approximately 62 million USDT borrowed against it, with a health factor of 1.61.

Egorov caused confusion and fear among CRV holders earlier when he deposited 277 million CRV tokens, accounting for 32% of the total circulating supply, to Aave. This deposit aimed to reduce the liquidation risk of a $65 million stablecoin loan, for which he had borrowed $37 million worth of USDT and $51 million worth of USDC in April.

Source: DeBank

Debates over Censorship Resistance: Other Stories

The censorship resistance debate is not limited to the recent incidents involving Curve, Aave, and stablecoin depegging. In the blockchain ecosystem, similar debates have emerged in the past. For instance, Bitcoin users complained about high fees caused by other users minting and trading Ordinals, which led to discussions about whether to ban Ordinals or consider a ban as a form of censorship. 

Another notable incident occurred when Tether blacklisted an address that drained $25 million from front-running bots, igniting a debate about potential censorship and the need for transaction transparency.

NYAG's Tether Investigation Documents Shared with CoinDesk

The stablecoin issuer Tether disclosed on Thursday that it had shared certain information regarding its business operations with CoinDesk, a prominent crypto media publication. This move was in response to a Freedom of Information Law request filed by CoinDesk with the New York Attorney General (NYAG) following a significant settlement in 2021.

It is worth noting that Tether agreed to pay $18.5 million in fines and cease its operations with New York residents in February 2021. This agreement was the outcome of an investigation by the NYAG which found that Tether's stablecoin was not consistently backed 1:1 with cash and the company had faced periods of lack of banking access. Despite initial resistance from Tether, it eventually decided not to oppose CoinDesk's request for the investigative documents.

However, Tether was quick to point out that the documents, which contain statements from Tether's banks, have since become outdated. Over the past two years, Tether has modified the core backing of its stablecoin, and these changes aren't reflected in the shared documents. The documents also reveal names of private individuals who were Tether's customers at the time.

Tether addressed the situation in a blog post, stating, "The published information, if properly read and interpreted, only demonstrates publicly the legitimacy of Tether’s business and the existence of its reserves." Tether's CTO shared the post, saying the recent issue was "a good stress test" for the company. 

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Source: Paolo Ardoino/ Twitter

Experienced business development and marketing executive Adam Cochran believes that the recent market movement is due to the leakage of Tether's financial information to Coindesk.

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Source: Adam Cochran/ Twitter

A Surprising Twist: New York's Attorney General Reveals Tether's Securities Holdings

Bloomberg reported that the New York Attorney General's office revealed that Tether Holdings Ltd. once held securities issued by Chinese companies as part of its reserves. The disclosure shed light on Tether's diverse holdings and raised questions about the quality of assets backing USDT, a stablecoin with a circulation of approximately $83 billion and a crucial role in cryptocurrency markets.

The disclosed documents unveiled Tether's holdings of securities from various companies, including state-owned Chinese giants such as Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., and Agricultural Bank of China Ltd. These holdings indicate a significant exposure to the Chinese market within Tether's reserve portfolio.

Additionally, Tether's reserves included securities from renowned international institutions like Deutsche Bank AG, Barclays Bank Plc, and ArcelorMittal SA. The presence of these securities demonstrates the broad scope of Tether's investment strategy, encompassing both Chinese and international companies.

The documents further outlined Tether's banking relationships, revealing the financial institutions involved in managing the company's reserves. Tether maintained banking relationships with entities such as Deltec Bank & Trust, Ansbacher (Bahamas) Limited, Capital Union Bank, and Far Eastern International Bank. These partnerships played a crucial role in facilitating Tether's operations and maintaining the stability of USDT.

Tether's reserves consisted of multiple assets, including US dollars, Bitcoin held on Bitfinex, and reserves worth over $2 billion stored in gold. These diverse holdings aimed to provide stability and liquidity to USDT, reinforcing its status as a stablecoin.

Moreover, Tether's lending program had reached a significant scale, with outstanding loans amounting to $5.1 billion as of March 31, 2021. These loans were collateralized by digital assets or securities, indicating the breadth of Tether's lending activities and its role as a key player in the crypto lending market.

The revelation of Tether's securities holdings has sparked concerns within the crypto community. Questions have been raised about the quality and transparency of the assets backing USDT. Given the substantial circulation and market influence of USDT, the underlying assets' credibility becomes a critical factor in maintaining market stability and investor confidence.

FAQ about Tether, Curve, and Aave

Q: What is the current status of Tether's stablecoin, USDT, after the depegging incident?

A: The depegging incident resulted in a slight deviation of Tether's stablecoin, USDT, from its peg to the US dollar. However, Tether's CTO, Paolo Ardoino, has assured the crypto community that the incident is not a cause for concern. Tether maintains readiness to redeem any amount, aiming to restore stability and maintain the peg.

Q: How did the USDT depegging incident impact the Aave protocol?

A: The USDT depegging incident led to increased trader activity, as some traders seized the arbitrage opportunity presented by the price difference between USDT and other stablecoins. This activity had an impact on the Aave protocol, with traders borrowing significant amounts of USDT and USDC, resulting in an adjustment of interest rates. The increased demand for USDT loans caused the deposit rate to surge and the borrowing rate to increase, as Aave's algorithmic model aimed to maintain market equilibrium.

Q: What measures did Curve founder Michael Egorov take to address his on-chain debt?

A: To mitigate the risk of liquidation associated with his loan position, Curve founder Michael Egorov proactively reduced his on-chain debt by returning $1.35 million USDT to Aave. However, it is important to note that a significant amount of debt, approximately 62 million USDT, still remains against his loan position, which is backed by Curve DAO (CRV) tokens.

Q: Have there been previous incidents of stablecoin depegging?

A: Yes, stablecoin depegging incidents have occurred in the past. One notable example is the depegging incident involving USD Coin (USDC), where USDC depegged below $0.90 due to issues faced by Circle, the issuer of USDC. This incident caused turmoil in many investors' portfolios, prompting traders to exit USDC at a loss. However, Circle managed to restore the peg to the dollar within two days.

Q: Are there other examples of debates surrounding censorship resistance in the blockchain ecosystem?

A: Yes, debates surrounding censorship resistance have arisen in various contexts within the blockchain ecosystem. One such example is the debate among Bitcoin users regarding high fees caused by the minting and trading of Ordinals. Additionally, the blacklisting of an address by Tether, which drained funds from front-running bots, sparked discussions about censorship and transaction transparency.


The events surrounding Curve founder's debt, the USDT depegging incident, and the debates over censorship resistance in the DeFi space have garnered significant attention in the crypto community. These incidents have raised important questions about the role of censorship resistance, stablecoin stability, and the impact on protocols like Aave. As the crypto landscape continues to evolve, it is crucial to closely monitor and analyze such events to understand their implications for the broader market.

This article has been refined and enhanced by ChatGPT.

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