DeFi Sector Faces Bearish Sentiment Following Recent Hack on Leading Decentralized Exchange

DeFi Sector Faces Bearish Sentiment Following Recent Hack on Leading Decentralized Exchange

In the aftermath of a recent hack on one of the largest decentralized exchanges, the DeFi sector has experienced a negative pullback. Leading Ethereum-based DeFi tokens have witnessed a significant downturn in the past few days, triggered by fears that arose following the Curve Finance hack over the weekend.

Curve Finance, known as the second-largest decentralized exchange for stable swaps on the Ethereum network after Uniswap, holds total deposits worth $2.09 billion according to DeFiLlama data. On July 30th, the protocol fell victim to hackers who exploited a vulnerability in the Vyper programming language, leading to an approximate $52 million loss affecting several Curve Finance pools.

Following the hack, Glassnode’s DeFi Blue-Chips Index, representing the top eight Ethereum DeFi tokens by market capitalization, dropped by 6.7% from its three-month high recorded on July 29, a day before the incident. Similarly, the DeFi Pulse Index, comprising the top ten DeFi tokens by market capitalization, traded 7.3% lower since the previous week as reported by Coingecko.

Among the biggest losers from both indices were Curve DAO (CRV), experiencing a 20.5% decline over the week, followed by Compound (COMP) down 18%, Synthetix Network (SNX) at a negative 17%, and Aave (AAVE) at negative 14%.

The Curve Finance hack also exposed DeFi to contagion risks arising from other protocols built using Vyper. Additionally, Curve DAO faced a further acute risk due to hefty loans taken by its founder, Michael Egorov, with the largest lending position on the popular Aave lending protocol. Egorov’s loan amount last stood at $49.2 million USDT borrowed against 257.4 million CRV tokens worth $148.6 million according to his Ethereum wallet data.

In the event of Egorov’s loan liquidation, there could be a substantial sell-off of Curve tokens, potentially dropping the CRV price below the principal loan amount on Aave. This, in turn, could put AAVE token holders at risk, as the deficiency between the principal amount and CRV collateral might be paid through selling AAVE from its Safety Module, as per its design.

Though Compound was not directly affected by the Curve hack, its governance token, COMP, seemed to lose some gains from the past few weeks. COMP token had risen by 153% from June 25, reaching a new yearly high of $77.34 on July 17, driven by bullish hopes surrounding a new DeFi protocol called Superstate launched by Compound’s founder, Robert Leshner, and potential short-squeeze speculation.

However, in the absence of an announcement regarding COMP token’s utility in Leshner’s new endeavor and other positive catalysts, COMP has retraced some of its gains and is currently trading at $59.45, up 89% year-to-date.

Similarly, Synthetix Network (SNX) surged to a three-month high of $2.99 in July after forming a partnership with crypto venture fund and market maker, Jump Crypto, to enhance the protocol’s liquidity. However, following the Curve Finance hack, SNX relinquished some of its gains, recording an 18.4% decline since the previous week. Nevertheless, SNX has still achieved a 10.6% increase in the last 30 days and an impressive 68.7% year-to-date growth.

On the other hand, Maker (MKR) buyers managed to maintain their significant gains in July, as the project increased exposure to real-world assets and implemented a tokenomics update to boost MKR buybacks. MKR was trading 2.7% higher over the week and has recorded a remarkable 151.6% growth since the beginning of the year.

Regarding decentralized exchange tokens that compete with Curve, Uniswap (UNI) and Sushi (SUSHI) experienced gains of 4.2% and 7.9% respectively over the week. However, Balancer (BAL) faced a decline of 6.2% during the same period.