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Over-the-counter (OTC) sales refer to the trading of assets directly between two parties, without the supervision of an exchange. These trades are often preferred when dealing with large volumes of an asset, to avoid significant price slippage and to maintain confidentiality. In the last weeks we’ve seen a prominent example of this kind of trade playing out in real time to prevent a possible catastrophe in DeFi. Here’s the story of the CRV OTC deals.
A Liquidation Approaches
The Curve founder had an enormous position in CRV, hundreds of millions, which were deposited on Aave and other lending protocols. He borrowed stablecoins against this collateral and notably purchased a mansion. Throughout most of the bear market, the debt appeared to be in good standing. However, as circumstances in the DeFi market changed, the debt came close to being tested a few times.
A devastating hack affected CRV, particularly the CRV/ETH pair. This security breach led to funds being stolen from the main liquidity pool where CRV was traded on-chain. As a result of the hack, CRV’s price began to decline. The founder’s position edged dangerously close to liquidation. With minimal CRV liquidity on-chain, liquidations would likely have triggered a catastrophic cascade, pushing the price further down and setting off additional liquidations.
An OTC Solution
With limited stablecoins in his wallet and the liquidation price creeping closer, the Curve founder had to act decisively to protect his position and prevent DeFi-wide consequences. He initiated off-chain, OTC sales of his CRV. The terms, confirmed by multiple buyers, were a handshake agreement to buy CRV at $0.40 and to hold it for at least six months. Initially, only a few buyers were involved, but as news spread, more potential buyers and projects eagerly expressed interest in these large CRV purchases. Ultimately, the founder sold hundreds of millions of CRV, significantly reducing his outstanding debt.
While the exact off-chain negotiations remain a matter of speculation, the method was apparent from on-chain transactions. Buyers sent stablecoins, typically USDT or USDC, to the Curve founder. The founder used these stablecoins to repay his debt on the lending protocols, allowing him to reduce his leverage and withdraw more CRV. The CRV tokens, once withdrawn, were sent to buyers at the agreed price of $0.40.
The largest deals amounted to tens of millions of dollars, with the usage of CRV varying across transactions. Several DAOs purchased CRV to cheaply incentivize their liquidity pools with gauge votes. Some market makers acquired CRV to maintain inventory for market-making on exchanges. A number of individuals, bullish on the Curve ecosystem, sought this opportunity for cheap and sizable exposure to CRV.
What Next For OTC in DeFi?
In the end, disaster was averted. No lending protocol absorbed bad debt, and all have since made adjustments to minimize exposure to CRV and the potential for a future liquidation cascade. New, incentivized CRV liquidity pools have been established, adding depth to CRV trades. While this saga led to a broader decentralization of CRV ownership, it highlights the pivotal role that bespoke deals can play in the new financial landscape of DeFi.
It also shows that there are DeFi primitives that are still waiting to be built. All of the OTC deals were negotiated off-chain and done on a handshake basis. While this time it worked, in other situations the reputation or willingness of market participants to trade on good faith may not be there. There are few OTC solutions that would have served this particular incident, which suggests that there are further areas in DeFi still to explore.