Abracadabra Finance has tabled a proposal aimed at adjusting interest rates to mitigate the risk of bad debt stemming from an $18 million loan extended to Curve Finance founder Michael Egarov.
The proposal recommends a substantial interest rate hike on the loan, elevating it to 200% for two specific pools referred to as “cauldrons,” which contain CRV tokens owned by Michael Egarov.
While the current interest rate on Egarov’s $18 million loan stands at 18%, the protocol’s intent is to elevate it significantly to 200%, effectively forcing Egarov out of his position.
By implementing this adjustment, Abracadabra seeks to reduce its exposure to CRV tokens to a mere $5 million.
The interest rate adjustment proposed is not a sudden spike, but a deliberate diminishing structure. It begins at 200% and declines progressively as the loan is offset through the automated sale of CRV tokens.
The developers envision that this methodology will culminate in the loan’s complete repayment within a span of six months, channeling all returns into the Abracadabra treasury.
The proposal elucidates, “The dynamics of collateral-based interest ensure that all interest will be directly levied on the cauldron’s collateral. This will instantaneously funnel into the protocol’s treasury, bolstering the reserve factor of the DAO.”
It further adds, “We are of the view that this approach will mitigate the adverse impacts often linked with such positions, in contrast to a straightforward interest rate amplification.”
Big Whale Opposes Abracadabra Finance’s Proposal
The proposal initially garnered significant approval from the Abracadabra community.
As of 13:00 UTC on Wednesday, an overwhelming 99% of the votes were in favor of the proposal.
However, the tide turned after a significant player entered the voting scene. Earlier today, the entity known as masterofdisaster.eth voted against the proposal, wielding a hefty 10 billion SPELL tokens.
In the current scenario, a dominant 72% of votes stand against the proposal, while 27% remain in favor of the change.
A community member of Abracadabra, “0xthespaniard,” had earlier expressed apprehension regarding the risks inherent in such a sizable loan.
In a post from June, this particular user recognized the importance of the 18% interest rate as a significant contributor to the protocol’s earnings. However, they also pinpointed the platform’s disproportionate downside risk.
The user had earlier expressed concerns, indicating that a potential liquidation could severely harm the Abracadabra protocol, especially considering the expected price repercussions on Curve’s decentralized exchange.
It’s worth noting that Curve Finance, a pivotal entity in the stablecoin exchange arena, recently underwent a security breach resulting in the loss of over $100 million in cryptocurrency assets.
This security lapse further caused a dip in the value of CRV tokens. Consequently, Michael Egorov’s significant holdings, estimated at $168 million, faced potential liquidation risks.