Curve’s potential liquidation risk presents a systemic challenge to DeFi as the founder seeks to settle debts.

On July 30, Curve Finance, a decentralized exchange operating on Ethereum, experienced a security breach due to a flaw in specific pools developed with the Vyper programming language.

The value of Curve DAO (CRV) fell by 20.91% on the day of the incident, reaching a two-month low of $0.58.

The following day, the decline in CRV persisted, hitting a seven-month low of $0.48 amid concerns regarding the potential liquidation of substantial loans totaling $100 million that Curve Finance founder Michael Egorov secured against CRV as collateral.

Nevertheless, encouraging developments such as the partial repayment of loans and significant negative positions in the derivatives market indicate that CRV might experience a short-term recovery.

The DeFi community steps in to support CRV

On Aug. 1, Egorov sold 39.25 million CRV tokens for stablecoins to several prominent decentralized finance investors, including Justin Sun, Machi Big Brother, and DWF Labs, for a total of $15.8 million, according to data from Lookonchain.

More and more institutions and investors bought $CRV via OTC!
Machi Big Brother bought 3.75M $CRV.
DWF Labs bought 2.5M $CRV.https://t.co/MQg382LigF bought 2.5M $CRV.
…
Michael Egorov has sold a total of 39.25M $CRV via OTC and received 15.8M $USDT.https://t.co/hQBlW5WG6J pic.twitter.com/NMIQ2p05ZL

— Lookonchain (@lookonchain) August 1, 2023

The purchasers acquired CRV at $0.40 per token, representing a 25% discount compared to the market price at that time.

Egorov also made a partial repayment of his Tether (USDT) loans on Aave, decreasing the principal from $63.20 million to $54.1 million, according to DeBank data. This partial repayment is viewed as a positive measure in mitigating liquidation risk.

At present, Egorov’s loans on Aave face liquidation if the CRV price drops to $0.36 or lower, according to DefiLlama.

Related: Vyper vulnerability exposes DeFi ecosystem to stress tests

CRV price analysis

The derivatives positions of CRV traders indicate that the token may experience a short-term rally as a contrarian strategy.

The funding rate for CRV perpetual swaps, which reflects the relative demand for long or short positions, shows that traders are actively shorting CRV, with its funding rate declining to -0.1% over eight-hour intervals, according to CoinGlass data.

This raises the potential for a short squeeze in the market, where those holding short positions may be compelled to buy CRV as its price increases.

The CRV/USD pair is hovering near multiyear lows at approximately $0.50. If buyers can establish support at this level, the price could rise in the short to medium term toward horizontal resistance levels of $0.78 and $1.23.

CRV/USD price analysis. Source: TradingView

A long position carries inherent risks, as the hackers still possess 7.1 million CRV tokens valued at $4.5 million. Should the attackers convert their holdings into stablecoins or more liquid tokens like Bitcoin (BTC) or Ether (ETH), the price may revisit this week’s low of around $0.48.

Furthermore, while Egorov has slightly reduced the liquidation risk, it has not been entirely eliminated.

This article does not constitute investment advice or recommendations. Every investment and trading decision carries risk, and readers should perform their own research before making any decisions.

This article is intended for general informational purposes and should not be interpreted as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.