Once in a while, I see people in crypto – this open and decentralized ecosystem based on free-market economics – suddenly turn into communists saying founders shouldn’t get rich and buy mansions.

The problem isn’t founders getting rich and deploying their wealth in DeFi protocols, according to their established parameters.

It’s that DeFi protocols need better parameters.

The founder of Curve Finance, Michael Egorov, took out about $100 million of stablecoin loans backed by $140 million of Curve’s CRV token. The risk of his loans getting liquidated had been looming over DeFi for months and this week it finally happened. Egorov got liquidated.

A few takeaways from this.

DeFi Don’t Care

The first is that it turns out, Egorov’s massive CRV backed loans didn’t present such a huge risk to DeFi as previously thought.

The concern was that if the price of CRV fell enough that Egorov couldn’t supply the additional collateral needed, then that CRV collateral would get liquidated, and if the loans aren’t paid back, then that would leave DeFi protocols with bed debt across five different DeFi lenders that had Egorov’s positions.

Important to note that the $140 million in collateral is about 30% of CRV’s market cap, which means it would be hard to sell that much CRV in the open market to cover those loans. So this single individual had started to pose almost systemic risk to DeFi.

But this feared scenario happened and beyond CRV cratering, DeFi lenders remain overall healthy. Lenders’ TVL, collateral ratios, and lending rates were all stable throughout Egorov’s liquidation.

Egorov Cashing Out

Next, some people are raising the alarm about Egorov taking out massive loans against his token, and even criticizing him for buying a huge mansion.

In my view, Egorov should be able to get rich from founding Curve and cash out on his CRV stack, in the same way that web2 founders get rich off their company equity.

A bit of a difference here is that Egorov, instead of selling CRV, took loans against it, and now that the CRV was liquidated, it was an indirect way of selling.

What I think you could criticize is how soon he started cashing out. Typical founders’ vesting schedules last 4 years with a 1-year cliff. This means founders can’t sell any shares for the first year since they get those shares. After the first year, they begin vesting their shares on a monthly or quarterly basis over the remaining 3-year period.

In the case of CRV, the token was launched in August 2020, and as soon as December, Egorov started to borrow against it on Aave. Still, borrowing against tokens isn’t exactly cashing out, and you could argue that liquidations four years after launch, roughly matches the average founder vesting schedule.

Better Rules

I don’t think the correct take here is that DeFi founders shouldn’t use the very infrastructure they built and tokens they launched to borrow more crypto. They’re just using DeFi, following DeFi rules, and paying market rates. There’s nothing wrong with that.

I think the problem here lies in what those DeFi rules are.

There’s definitely something off here if someone is able to put up 30% of the total market cap of a token as collateral, especially for tokens that don’t have enough liquidity to be able to find buyers worth that collateral in short notice.

So while all lending protocols take their own lending ratios into account, we should take advantage of the fact that DeFi is fully transparent and make sure that lending protocols also consider global lending ratios. What is total collateral and total loans being taken out against assets in all of DeFI.

Onetruekirk, the founder of Credit Guild, makes this point too. He recommends that when global leverage ratios are becoming risky, protocols should gradually alter parameters including setting the Loan to Value ratio to zero, gradually raising the liquidation threshold, and raising interest rates.

So now that this threat of Egorov’s liquidations has happened, DeFi is still standing strong, but lenders should take lessons from the scare to reduce ecosystem risk.