A look into Mochi INU and how the drama may unfold
Today has been one of those days in DeFi that get you riled up since someone does the unthinkable but possible in a way that stuns everyone. Mochi Finance did that today in a way that is questionable to say the least. Let's dig in shall we?
Background
As we all know, Curve is the dominant stablecoin exchange, with most stablecoins clamouring to be listed and have a portion of the CRV rewards redirected to their trading pool. The way you can redirect these rewards is through locking your CRV tokens for 1-4 years and receiving veCRV.
The longer you lock, the more veCRV you get. Now along comes Convex which basically is a wrapper around the Curve protocol which lets you lock your CRV tokens through the Convex protocol and then Convex holders can collectively govern the Curve protocol with the CRV locked. Why would they do this? To get CVX, their native governance token of course. Why would anyone buy CVX? So that they can use it to influence Convex's holdings of veCRV.
So most protocols either have the options of buying CRV directly or CVX instead which in turn lets them control Curve. To make this even more fun, in order to gain influence you can bribe CVX and CRV holders directly to vote on whatever you want. Kind of expensive but still cheaper than buying a ton of tokens outright.
This is the context you need for the next part.
How the Curve wars work
Now that you understand how the above mechanics of this convoluted game work you're in a stronger position to understand how the war works.
You're a new stablecoin project and you want to ensure liquidity for your stablecoin, but you also need to attract liquidity so that people can easily sell your stablecoin for USDC/USDT/DAI. So what do you do? Figure out how you pay with your governance token to ensure sufficient liquidity.
The common playbook is basically allocate 50% of your token supply to:
Setting up ridiculous liquidity mining rewards for anyone who supplies rewards for your stablecoin pair on Curve
Buying CVX or CRV tokens that can be locked up to then influence governance with your own protocol
Paying existing CVX or CRV holders to get more CRV rewards for your Curve pool
So to summarise the fundamental trade going on here is:
Print governance tokens to...
Pay Curve holders to ensure their stablecoin is liquid
Ensure that minters of the stablecoin can use the liquidity to sell out into USDC
Minters increase the TVL of the protocol which causes...
Price of governance token to increase
Which leads to... more printing of governance tokens to repeat 2-6.
So who wins? Well Curve holders and users who mint the stablecoin and get heavily subsidised rates. Who loses? Governance token holders — only for this example though.
Entering Mochi
So we have our similar setup from the above where you have all the perfect ingredients:
Mochi INU as the native governance token
Plenty of tokens to dilute and spent to pay Curve holders
A stablecoin minting functionality which lets you use risky collateral to mint the stable and then sell into a pool hosted with Curve
Okay so what's the magic trick they pull off here? Let's resume from Step 5 in the block above where the price of the governance token increases:
List native governance token as collateral in borrowing platform with 90% loan-to-value
Mint stablecoin with new governance token created 1 day ago
Sell freshly minted stablecoins for DAI
Use DAI to buy $30m worth of CVX
Lock up CVX to get more voting power in Curve
Rinse repeat steps 6-10 until ... idk?
Obviously this doesn't go down without any outcry from the community.
While it's easy to see this as one elaborate game which a protocol exploited, the liquidity providers in Curve are very likely to be rekt as a result of this. It's all alluring and exciting for now until people get hurt.
Final Thoughts
Pretty easy to point fingers about how wrong it is for Moch — right? Yes and no. I think there's another side to this story that hasn't really been mentioned and deserves a perspective.
Here's a great excerpt from an ARCx community member who I think has some points worth taking note of:
To boil it down, if Curve governance has been setup in a way that allows for bribes and encourages it, then when the system becomes used for particularly immoral purposes should we look to the actor or the designers of the system that allowed or even encouraged the behaviour in the first place? This isn't to blame anyone but rather a philosophical one which designers of such decentralised systems should ask themselves when architecting the system.
The future of finance lies in our hands, how we design it will make all the difference for what outcomes are able to occur.