How Did The Curve Dao Hack Affect the StableCoin Market? 


09th August 2023| ZebPay Trade-Desk

On June 15, the stability of tether, denoted as USDT, experienced a slight deviation from its established peg to the United States dollar. This deviation was attributed to an imbalance within Curve’s 3pool, a decentralised finance pool designed to accommodate stablecoins. As a result of this imbalance, the price of USDT exhibited a decline of approximately 0.3%, causing its value to hover around 0.997 in relation to the US dollar. The root cause of this phenomenon was the substantial increase in the weightage of USDT within the Curve 3pool, surpassing its typical allocation of 33.1% and reaching over 70%.

Curve’s 3pool functions as a liquidity pool for various stablecoins within the decentralised finance ecosystem. This pool primarily comprises three of the most prominent stablecoins in the market: USDT (Tether), USD Coin (USDC), and DAI. The primary objective of such a pool is to facilitate seamless trading and liquidity provision among these stablecoins. In this context, an alteration in the proportion of a specific stablecoin’s weightage within the pool can be indicative of significant market activity involving that particular asset.

When the weightage of a stablecoin within the Curve 3pool experiences a substantial increase, as observed with USDT on this occasion, it implies that there has been an intensified selling pressure or demand for that specific stablecoin. This alteration in weightage serves as a reflection of the market dynamics, highlighting the relative buying or selling activity of the stablecoin. The significant deviation in the weightage of USDT in Curve’s 3pool suggests that a notable volume of USDT was being sold or exchanged, potentially indicating a shift in market sentiment or trading strategies related to this particular stablecoin.

Read more: Difference Between USDT and USDC

The current weightage of USDT in Curve’s 3pool stands at approximately 73.8%. This suggests that traders are actively converting or selling their USDT holdings in exchange for other stablecoins like DAI or USDC within the pool. This shift in trading behaviour indicates a preference for diversifying away from USDT and into alternative stablecoins. It’s worth noting that the concentration of USDT in Curve’s 3pool had previously exceeded 50% in November 2022, particularly during the time of the FTX collapse. This highlights instances when traders might have sought to move away from USDT and into other stablecoins due to market uncertainties or specific events.

The underlying cause of the imbalance can be traced to a significant wallet address known as CZSamSun, which undertook a substantial borrowing action involving 31.5 million USDT. This borrowed sum was subsequently exchanged for USDC, leading to a minor disruption in the typical pegged value relationship between USDT and the U.S. dollar. To execute this complex manoeuvre, CZSamSun utilised a notable collateral of 17,000 Ether and 14,000 staked Ether (stETH). This collateral enabled the conversion of the borrowed USDT into USDC, a process that was facilitated through the use of the 1inch Network, a decentralised exchange aggregator.

Following this initial step, the borrower proceeded to allocate substantial deposits into two different versions of the Aave platform, specifically Aave v2 and v3. These deposits amounted to a total value of $10 million and $21 million, respectively. Subsequently, the borrower acquired a loan of 12 million USDT from Aave v3, which was then deposited into Aave v2, potentially indicating a strategic financial manoeuvre.

Approximately 20 minutes after CZSamSun initiated the USDT borrowing, another wallet address (0xd2…0701) entered the scene. This address leveraged its assets, particularly 52,200 staked Ether (stETH), as collateral through Aave v2. This strategic move allowed the address to secure a substantial loan of 50 million USDC, capitalising on the price discrepancy between USDT and USDC.

The resulting slight variation in the price of USDT had a notable impact on the USDC/USDT trading pair on the Binance platform. This pair experienced an uptrend, reaching a new high for the year at $1.0034, which can be attributed to the dynamics of the lending and borrowing actions. Within the composition of Curve’s 3pool, USDT emerged as the dominant component, accounting for 73.79% of the total, followed by DAI at 13.05%, and USDC at 13.16%. This intricate interplay of transactions and collateral utilisation underscores the complexity and interconnectedness of the decentralised finance ecosystem.

Tether’s Chief Technology Officer, Paolo Ardoino, took to the social media platform Twitter to address and alleviate concerns within the crypto community regarding the recent depegging scare of the stablecoin. Ardoino sought to reassure users that the situation should not be a cause for undue worry, emphasising that Tether is fully prepared to redeem any amount as necessary.

This incident of a stablecoin depegging is the most recent in a series of events, following closely after the USDC (USD Coin) depegging incident that unfolded a few months prior. During this earlier episode, the value of USDC fell below $0.90, prompting significant upheaval and disruption in the portfolios of numerous investors. The depegging of USDC was attributed to a situation where Circle, the company behind USDC, revealed that it had encountered challenges with funds totaling over $3 billion that were held with Silicon Valley Bank.

Although Circle managed to secure sufficient capital within a span of two days to reestablish the peg of USDC to the US dollar, the initial depegging event caused widespread panic among traders and investors. This heightened anxiety led to a considerable number of traders opting to exit their USDC holdings at a loss, in an effort to mitigate potential risks associated with the unstable situation.

The occurrence of stablecoin depegging incidents, like the aforementioned instances involving Tether and USDC, underscores the sensitivity and potential vulnerabilities within the crypto market. These events have highlighted the intricate connections between stablecoins, their pegged values, the underlying assets or reserves, and the broader market sentiment. As the crypto landscape continues to evolve, such incidents serve as reminders of the need for robust mechanisms to maintain stability and instil confidence within the market.

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