Reflecting on the Curve Incident: How DeFi Recovered from the Brink of Collapse?
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Reflecting on the Curve Incident: How DeFi Recovered from the Brink of Collapse?
Those who say "DeFi is dead" are wrong—in fact, it's stronger than ever.
Navigating Web3 tides with focused insightsAuthor: DEFI DAVE
Translation: TechFlow
Snakes hold a special place in the human collective unconscious. They symbolize transformation, rebirth, immortality, and healing. This week could be said to mark DeFi's own rebirth. A toxic 0-day vulnerability deep within the Vyper programming language’s compiler triggered cascading effects across the entire stack and market, leaving short-sellers salivating.
As one of the cornerstones of DeFi, Curve Finance sat at the epicenter of this event—pushing the protocol into its most challenging test yet and requiring unprecedented actions to mitigate damages from the potential exploit. On-chain white hats fiercely battled hackers, attempting to recover losses while attackers tried to extract millions in liquidity. Meanwhile, builders like Curve founder Michael Egorov and others held the line, leveraging novel incentive mechanisms from their close partner Frax, along with off-chain deals with allies, seemingly rescuing the CRV token from spiraling into oblivion.
As with every crisis, protocols undergo stress tests under the worst conditions. Those that survive emerge stronger; those that don’t, perish. Decentralized finance is no stranger to tens of billions of dollars vanishing into thin air—just as happened last year with Terra Luna. While we speak of protocols, they are ultimately made up of people. In these trying moments, we witnessed the community rise collectively before the world’s eyes—to either triumph or be eliminated.
With the smoke of war finally clearing, we can reflect on what happened, why it happened, and what it means for the future of decentralized finance. There is no doubt that although the worst has largely passed, some introspection is indeed necessary.
(The Forgotten) Ghosts in the Machine
Vyper is a programming language designed for the Ethereum Virtual Machine (EVM), launched in 2017. Though less popular than Solidity, Vyper offers greater linguistic diversity for the EVM—an essential safeguard against monoculture. I shudder to imagine how much worse things would be if only one language existed. Regardless, Curve uses Vyper to build and deploy its smart contracts. In fact, to emphasize its importance, last year the Curve community approved a vendor assessment to fund Vyper development.
Ultimately, the vulnerability comes down to incentives around compiler audits. Compilers are magical software tools that translate human-written code into machine-readable instructions. They reside in a part of the stack mistakenly assumed secure, thus often overlooked by auditors focused primarily on smart contract layers. Moreover, due to its structural design, Vyper is generally easier to read than Solidity—making vulnerabilities simpler to detect. In the days following the hack, community members issued repeated calls for creating proper incentive structures to prevent similar exploits in the future.
For hackers, however, the motivation is clear—they dive deep into virtual machines searching for untapped rewards, especially as bounty opportunities in vulnerable protocols grow scarce. During years-long bull markets, even obscure projects accumulated hundreds of millions in total value locked (TVL), making them attractive targets. As low-hanging fruit disappears, sophisticated operators are forced to innovate, eventually leading them to an often-forgotten layer: compilers.
To grasp how long this vulnerability went unnoticed, consider that it had existed since 2021 and was only accidentally fixed in the latest Vyper version 0.3.1. However, liquidity pool contracts containing native ETH and written using versions 0.2.15, 0.2.16, and 0.3.0 remained operational. The first attack occurred over the weekend, and when everything concluded, $69 million in value had been stolen. The hardest-hit pools included JPEG'd, Alchemix, Metronome, and even Curve’s own liquidity pools.
Time is critical when facing vulnerabilities—and so is privacy. In times of crisis, white hats unite to find solutions. Heroes emerge, such as 0xc0ffeebabe, whose efforts and actions recovered millions in funds. Unfortunately, not everyone stands on the same side. As OtterSec auditor Robert Chen noted: “Auditors don’t pay for the externalities their reports create. Instead, they’re rewarded through likes, retweets, and publicity.” Once again, we see the role of incentives—but rather than hackers scavenging scraps, auditors appear to value retweets more than fund recovery.
Sharks Circling CRV
CRV is a governance token tightly coupled with the Curve protocol. Its significance lies in the behaviors it incentivizes—primarily deep liquidity. Users who lock their CRV into veCRV gain voting power over where liquidity provider (LP) rewards are directed. This pioneering model laid the foundation for a complex ecosystem of voting incentives and helped earn Curve the nickname “liquidity black hole.”
One of the most severely affected pools was the CRV/ETH pair on Curve—the primary source of CRV’s on-chain liquidity. This appeared particularly problematic for Michael, who holds a large amount of his own CRV (and substantial positions across various lending protocols like Fraxlend, AAVE, and Abracadabra). If he were liquidated, CRV would approach zero, throwing Curve’s entire incentive structure into chaos.
Michael is no stranger to managing leveraged borrowing positions. In fact, according to Curve Cap data, Michael has been actively using on-chain money markets since 2018—never once being liquidated, not even once. It was precisely through interacting with lending protocols that Michael was inspired to build Curve, enabling smooth swaps between stablecoins, which later led him to deploy crvUSD—a mechanism offering gentler liquidations. Now, sharks circled his bleeding collateral position, and Michael needed to act fast to prevent them from devouring his CRV holdings—so he did what he does best.
Among all lending positions, priority lay with his Fraxlend exposure. Michael had a $17 million loan on Fraxlend backed by $24 million in collateral, with utilization nearing 100%. Fraxlend is designed so that when utilization hits maximum capacity, interest rates automatically double—and then double again every 12 hours. Left unchecked, annual percentage yields on this pair would skyrocket into the thousands, guaranteeing liquidation.
Michael took unprecedented action—he created a unique gauge rewarding users who provide liquidity with fFRAX (the receipt token for FRAX in the Fraxlend CRV pool). The goal of this gauge was to incentivize FRAX borrowing to reduce utilization in the CRV/FRAX pool. As a secondary market for Frax debt, this incentive mechanism may have other interesting applications in the future.
Beyond incentives, even more powerful was rock-solid relationships—trusted alliances that could be relied upon even in extreme circumstances. OGs and current influencers across crypto offered support; even Wu Jihan tweeted about buying in. Within hours of launching his fFRAX/crvUSD gauge, millions worth of CRV were sold off-chain to Justin Sun, DCF God, CT2P, and unknown anonymous buyers. Once news of these sales became public, CRV’s price rebounded, and millions in short positions were liquidated. With OTC deals still ongoing, CRV and Curve appeared to have weathered the storm.
Conclusion
The most immediate danger has nearly passed. With loan positions now safely managed, what conclusions can we draw from this turbulent sequence of events? First, those declaring “DeFi is dead” are wrong—in fact, it is stronger than ever before.
Had this crisis occurred in the opaque world of traditional finance, we might not learn the full details for years. But because this story unfolded transparently on-chain, visible to all, we were able to dissect each transaction and understand exactly what transpired. This unprecedented transparency allows us to monitor the health of lending protocols and liquidity pools piece by piece, and comprehend why certain actions were taken.
Yet we must remember: while DeFi democratizes opportunity and lowers barriers to entry, that doesn’t mean outcomes are equal. Incentives care nothing for sentiment—they care only about accumulating more value. Whether it’s monetary gains from exploits, social status from organizing recoveries, motivations behind recommending parameters to lending protocols, or game-theoretic economics underlying borrower repayments—every single action taken over the past week was the result of ruthless, unyielding incentives.
If DeFi truly aims to reach the scale of traditional finance—especially as ever-larger amounts of value hang in the balance—it must confront the reality of an incentive-driven world and build accordingly. This was Satoshi’s way of thinking—and so too must we do the same, if we wish to thrive.
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