Curve Grant compensation for affected users of the June 12th crvUSD de-peg incident

[0xSEM]

Summary:

On June 12, 2024, several sUSDe Llamalend users were hard-liquidated due to a crvUSD upward depegging event. The total loss is about $31,000. The incident has been reported by the LlamaRisk team, and actions will be taken to prevent similar occurrences: crvUSD Upward Depeg (June 12, 2024) Incident Report - Llama Risk.

This proposal aims to repay affected users for their losses using Curve Grants funds. Total amount approximately: 30,928/0.2846 = 108,671 CRV

Motivation:

The incident was caused by an upgraded version of the PegKeeper (V2), which was introduced to prevent spam attacks. As a side effect, the surge in crvUSD demand during the mass liquidation of Mich’s position caused crvUSD to depeg upwards to as high as ~$1.15, which PegKeeper couldn’t prevent due to the newly introduced ‘deviation’ check.

Llamalend markets by design should only liquidate based on dropping collateral value, but never due to an upward depegging of crvUSD.

Specification:

The following approximate losses were suffered by the sUSDe lend.curve market:

Curve.fi AMM: 0x6505aeC799AC3b16a79cb1Ae2A61884889b54C1b Controller: 0xB536FEa3a01c95Dd09932440eC802A75410139D6 Monetary Policy: 0xf574cBeBBd549273aF82b42cD0230DE9eA6efEF7

For:

PegKeepers didn’t respond as expected due to a newly introduced design flaw. This caused crvUSD to depeg upwards and liquidate several positions.

lend.curve markets are marketed as isolated markets. They turned out not to be isolated as the sUSDe pool liquidations were a direct cause of the liquidation demand in the crvUSD/CRV pool.

The learnings from the incident are valuable for the protocol, warranting compensation to build a more resilient model for the future (Recommended Mitigations section: crvUSD Upward Depeg (June 12, 2024) Incident Report - Llama Risk).

Against:

Llamalend is advertised as BETA. Usage is 100% at your own risk.

[ON-DeFi]

Against.
Llamalend is advertised as BETA. Usage is 100% at your own risk.

Curve DAO has been effective in payouts to other events in the past I think there is a clear beta use risk for new projects like crvUSD.

[majeed3011]

Good position of the company

[0xSEM]

A vote has been created to vest a total of 112,637 CRV ($30,975) over a period of 1 year to all affected address of the crvUSD/sUSDe depegging incident: CRV Hub

The VestSplitter contract is used (same as for Curve Vyper hack) for distribution of the vested funds.

Deployment script is available here. Price has been adjusted to the CRV daily high of $0.275.

GitHub - 0xSEM/curve-crvusd-depeg-incident

Please refer to the LlamaRisk report for a clear description of the incident: crvUSD Upward Depeg (June 12, 2024) Incident Report - Llama Risk

Although Curve Lend is a siloed lending market, meaning the risks associated with the markets should be limited to lenders and borrowers in individual markets, this upward depeg of crvUSD affected users in markets other than the CRV-long market. This is because all Curve Lend markets denominate their price against crvUSD rather than USD. The spike in crvUSD price therefore is interpreted by the market as a reduction in the counterparty asset’s price.
In some cases, such as the sUSDe-long market, there is a reasonable expectation that the counterparty asset (in this case a synthetic USD token staked in Ethena) will keep a relatively stable price, encouraging users to borrow at higher LTV ratios. The recently created sUSDe market was deployed to allow up to 35x leverage on sUSDe, which was advertised by the Curve Twitter account on June 9. Users may have been prepared for the risk that sUSDe may legitimately lose its peg due to restrictions on redemption imposed by its staking mechanic, but likely they were unprepared for the scenario where crvUSD depegs upward, causing the market to interpret their collateral as depegging to the downside. Users in the sUSDe market were inadvertently liquidated during this event. This demonstrated that, in certain scenarios, the siloed markets in Curve Lend, designed to mitigate risks to users, actually have generalized dependencies that may cause knock-on effects between siloed markets.
This scenario was not expected behavior, and the failure of the Pegkeeper to regulate the crvUSD supply was ultimately responsible for the depeg. The following section will describe the Pegkeeper design and why it did not perform as expected.

[agureevroman]

I recognise lend market as between 2 coins: sUSDe and crvUSD, according to oracles set. So all risks should be accounted for both coins, same as if market was against depegged USDC. I personally against putting one coin exclusively as USD since each one has different set of risks, thence all coins in PegKeepers are treated equally but different risk parameter(debt ceiling).

That was Curve’s problem for not maintaining the peg indeed, for now issue is mitigated and there is a vote up for doing it even better. Though lend market is not part of stablecoin itself, so IMHO it’s correct to lend against its price. Moreover, it is stated crvUSD all over UI (correct me if it was different back then).

Nonetheless, compensation is not that big, so up to holders

[wavey0x]

I am relying on the Llama Risk write up for my understanding of the events that took place.

Due to a peg keeper misconfiguration and the relatively small size of the ask here, I find this proposal agreeable. After all, it led to clear protocol-level changes - demonstrating that the losses endured by the affected users served value to the protocol. If those losses are assigned to the protocol, it comes at a much lower cost than other preventative expenditures like audits.

It is certainly important that the DAO be cautious to avoid creating expectations of underwriting regular DeFi risks taken on by users. To my eye, this case has nuance beyond just “precedence”, and the relatively small size of the ask is an important consideration. As well as an opportunity to do good by clearly curve-aligned early adopters.

Fwiw:
OP asked me to help review and craft the on-chain parts of this governance proposal so that he could execute it. Please review the work yourself before casting a YES vote.