JPMorgan says Curve contagion contained, but DeFi ‘shrinking or stalling’

The contagion from the recent Curve Finance attack to the decentralized finance (DeFi) ecosystem appears to have been contained, according to JPMorgan.

"While the decline in the CRV token price caused some contagion to DeFi platforms using CRV as collateral, the fallout has been contained so far," JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in a report today. "However, the overall DeFi ecosystem remains in shrinking or stalling mode."

Curve Finance suffered an exploit on Sunday that tanked the price of its native CRV token and put over $100 million worth of loans belonging to its founder Michael Egorov at risk of being liquidated. Egorov took multiple loans on various DeFi lending platforms, where he used CRV as collateral and mostly received stablecoins. The liquidation of his large loans could have put pressure on other DeFi protocols due to CRV's role as a trading pair in various liquidity pools.

Curve Finance attack 

The attack occurred on Curve Finance's four main liquidity pools due to a vulnerability in Vyper, a programming language widely used in DeFi applications. Since the attack, Egorov has moved quickly to sell his CRV holdings to strengthen his loan position and avoid liquidation. Thus far, he has sold a total of 72 million CRV to 15 institutions/investors via over-the-counter deals at a price of $0.4 per token and received $28.8 million in total to repay the debts, according to on-chain analyst Lookonchain. Egorov currently still has 374.18 million CRV ($220.4 million) in collateral and $79 million in debt on five DeFi platforms, per Lookonchain.

Several large investors, including Tron founder Justin Sun, Huobi co-founder Jun Du, crypto trader DCFGod and Mechanism Capital co-founder Andrew Kang, have coordinated to attempt to save Curve Finance. "This co-ordination has been limiting the contagion effect," JPMorgan analysts said.

DeFi ecosystem 'stalling'

Speaking of overall DeFi ecosystem, the analysts said growth has stalled over the past year due to several challenges, including the collapses of Terra and FTX, the U.S. regulatory crackdown and uncertainty, hacks and higher transaction fees. "This has eroded investor's confidence and led to outflow of funds and exiting of DeFi users," they said.

But some parts of DeFi are performing well, according to the analysts. Those are the Tron ecosystem and Ethereum Layer 2 networks, including Arbitrium and Optimism, which all have seen their total value locked (TVL) rise over the months.

"The rise in their TVL could be attributed to them offering faster and cheaper transactions to users, who otherwise were facing network congestion and higher transaction costs in Ethereum," the analysts said.