‘No preference to sneak anything through’: Gauntlet takes another shot at Curve founder’s $64m loan on Aave

DeFi risk management firm Gauntlet has once again advised its client Aave, a major DeFi lending protocol, to take action against a risk that could cost it a lot of money.

However, critics described the move as an attempt to “sneak back in” a proposal that the protocol’s governance had already rejected.

The vote highlights the intricacies of DeFi governance, the disproportionate risk posed by one debt position, but also the overall transparency of it all.

Aave is governed by a community of token holders, some of whom are represented by delegates.

Gauntlet, an Aave service provider on a $2 million annual fee is tasked with analysing the safety of lending and borrowing parameters on the protocol.

Anything Gauntlet recommends must go through a governance procedure that requires proposals posted on an online forum, discussions, and a vote.

Gauntlet proposed last month that Aave DAO freeze Curve tokens and set loan-to-value ratio for Curve on Aave v2 to zero to mitigate against the risks posed by loan position on the crypto lending protocol.

The loan in question belongs to Curve Finance founder Michael Egorov, who borrowed $65 million on Aave v2 by collateralising $220 million worth of Curve tokens — which represents 30% of the entire Curve supply.

‘I thought it was rejected by the community already, but Gauntlet includes it again and again.’

—  Michael Egorov

Aave DAO delegates unanimously rejected Gauntlet’s proposal.

Now Gauntlet has proposed a second vote on the same issue.

“Gauntlet continues to recommend freezing CRV and setting the CRV LTV to 0, despite the AIP failing to pass,” the company said on June 27, referring to its previously failed proposal earlier in the month.

The latest proposal to address the supposedly risky debt position is baked into a broader set of unrelated recommendations to the DAO, which led to accusations that the Gauntlet was trying to “sneak it back in.”

If the omnibus proposal were to pass, then the freeze would pass too.

“I thought it was rejected by the community already, but Gauntlet includes it again and again,” Egorov told DL News.

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Tarun Chitra, CEO and founder Gauntlet, told DL News that the firm “was just double checking the temperature check” and “there wasn’t any malicious intent — as has been [stated] by some.”

DAO governance temperature checks gauge sentiment among governance token holders about a proposal before it proceeds to a final execution vote.

“We have no strong preference to push, or sneak, anything through,” Chitra told DL News. “In our experience it’s good to temp check the community when there is no reactive urgency perceived.”

“It looks like the temp check will fail, and we will take that as a definitive signal and continue to balance risk/reward with that in mind across v2,” he said.

Aave DAO delegate Marc Zeller said on the DAO’s governance forum on Wednesday Gauntlet’s “attempt to sneak it back in another proposal has been noted and will be remembered.”

“The governance already stated clearly their opinion on this very topic via a previous vote,” he said.

Zeller pointed to his governance forum posts when DL News requested for comment.

Chitra told DL News the move was “partially due to the fact that there was some community pressure regarding changing LTVs on TUSD.”

The DAO executed a proposal on July 3 to lower the risk associated with borrowing TrueUSD’s stablecoin TUSD on Aave v2.

The fears over TUSD stemmed from stablecoin issuer Prime Trust’s insolvency, but TrueUSD said it no longer uses Prime Trust.

Lingering risk of bad debt?

Egorov has a lot of Curve tokens thanks to his work on the protocol. And instead of selling those tokens, he takes out a loan on them.

While the loan has a health factor of 1.85, which indicates a low probability of liquidation risk, Gauntlet last month called it a risky position that could leave Aave with bad debt if Curve token’s liquidity shrinks.

“CRV token liquidity has [...] decreased 50% over the past couple of months, both on chain and globally,” Gauntlet warned Aave DAO members on June 12. “This can cause future risk, especially if the CRV used as collateral by this account continues to grow.”

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Egorov says he will have to act quickly if the proposal ever passes through.

“Probably my incentive, if the vote passes, would be [to] take as much as possible on Aave before the vote is enacted — because I will not be able to borrow more in the future — and only be reducing the position depending on Curve price in the future,” Egorov told DL News.

“But in my opinion, that’s a bad incentive,” he said.

“I still don’t want to be rotating it to Aave v3 because one cannot disable borrowing of CRV there — and I don’t want my CRV borrowed.”

Past experience that cost Aave $1.6 million

Avraham Eisenberg — known for his $110 million Mango Markets hack last year — once hunted this position in November by shorting Curve but ended up losing $10 million.

Aave, however, had to repay $1.6 million in bad debt due to the attack.

Gauntlet’s latest attempt to freeze the tokens, however, appears not to have elicited the same level of attention, judging by the lack of engagement on the forum and in the wider community.

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Gauntlet put the matter up for a preliminary Snapshot vote on Tuesday that is scheduled to end on July 7.

The results of the vote are currently encrypted as the poll is utilising Snapshot’s shielded voting feature which keeps the tally hidden until the end of the vote.

Zeller said on the forum that his Aave Chan Initiative would vote no to the proposal.

Data from Snapshot shows Zeller voting with 234,000 Aave tokens, more than 15 times the voting power of the second-highest voting address.

Gauntlet’s recommendations could be included in an on-chain vote if the Snapshot poll passes.

Disclaimer: The two co-founders of DL News were previously core contributors to the Curve protocol.

To share tips or information about DAO governance please contact the author at osato@dlnews.com.