New Backup Pool Solution: A Remedy For CRV Liquidation Crisis?

In a recent development to stabilize the crypto market, Lightning HSL presented a groundbreaking idea aiming to prevent the looming risk of Curve’s native token CRV liquidation. The crypto world was sent into a frenzy after the recent exploit on Curve Finance, which resulted in a significant crash in the value of CRV, threatening large-scale liquidation.

The New Backup Pool Solution

Lightning HSL’s proposal is centered around the introduction of a mainstream stablecoin backup liquidation pool. USDT, a commonly used stablecoin, serves as an example. Under this plan, any user looking to acquire discounted mortgage products can deposit USDT into this backup pool. Users on the brink of liquidation could then use the USDT in the backup pool to repay debts, subsequently withdrawing their collateral to sell to the backup pool at a discounted rate.

However, there is skepticism about this idea. Analysts contend that even while this method may approximate the stable pool proposed by Liquidity, it might not produce the desired results in practical settings. Concerns arise due to the significant differences in the collateral assets between the two. Critics worry that customers buying reduced CRV could quickly bring the market back to its previous crash, putting their positions at risk of liquidation.

These analysts contend that the lending platform’s strategy is what’s at the heart of the issue. It should separate the assets of the lending pool, classifying collateral according to its market liquidity and setting suitable borrowing restrictions in accordance.

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CRV Gets Protection On Binance

In a positive move following the exploit, crypto market makers intervened on Binance to support CRV. Data from Paris-based crypto provider Kaiko reported that the 2% bid-side market depth, a measure of buy orders within 2% of the mid-price, rose from roughly 500,000 CRV to over 1 million CRV post-exploit.

Following the late Sunday exploit, CRV quickly decreased more than 14% to 58 cents. The sudden dip sparked more CRV selling as concerns about a potential liquidation of Curve founder Michael Egorov’s multi-million dollar worth of USDT and FRAX borrowings that were secured by CRV grew. CRV token is trading at $0.5783, at the time of writing.

It is yet to be seen whether Lightning HSL’s proposal will be implemented or how it would influence the crypto market. However, it opens up a dialogue on novel mechanisms to mitigate risks associated with crypto borrowing and liquidation.

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