DeFi protocol Abracadabra was among those rushing to introduce somewhat drastic measures to mitigate the risk of potential bad debt from the Curve founder’s position.

Abracadabra Money, a decentralized lending protocol that allows users to exchange collateralized interest-bearing assets for stablecoin loans, has put forth a governance proposal to substantially increase interest rates that puts Curve Founder Michael Egorov in a tough position.

A governance proposal on Wednesday called for an agressive upwards interest rate adjustment in two of its pools, which it calls “cauldrons,” that consist of CRV that belongs to Egorov.

Egorov’s outstanding principal amounts to $18 million, which was taken out under an original interest rate of 18%. However, the proposal sought to raise the base interest rate to 200% which would be combined with a multiplier based on the level of collateral provided. This means that if Egorov’s collateral ratio was 70% then the interest rate would be a drastic 5000%.

If implemented, Abracadabra’s exposure to CRV would be reduced to just $5 million. The proposal’s authors expect the loan to be paid back in six months at this interest rate, and after the principal has been repaid, the base rate would decrease. 

“We believe this solution will reduce negative externalities associated with such positions compared to a simple interest rate hike,” they said in the proposal.

Governance data shows that a significant majority of the Abracadabra community appeared to be backing the proposal, despite some critics taking issue with the protocol making such extreme changes to the fundamental terms of a loan via governance.

Abracadabra is forcing @CurveFinance founder to repay in a very controversial way:

I understand the protocol’s eagerness to protect its users, but in violation of contractual terms imprinted in smart contract coding, it is changing loan terms unilaterally

Imagine banks change… pic.twitter.com/hd730C77Wr

— DeFi Cheetah 🐆 ¤🫐🦇🔊🌿 (@DeFi_Cheetah) August 2, 2023

 The Abracadabra team has since revised the terms of the proposal, taking into account certain repayments that have been made by the Curve founder, as well as an increase in overall CRV liquidity.

“Since the posting of AIP 13.5 on 01/08/23 the situation around the MIM loan backed by CRV as well as the overall on-chain liquidity conditions have changed. Multiple repayments have been executed bringing the total amount of MIM backed by CRV assets to 12.5m,” stated the proposal author, who has voted against the previous proposal.

The base interest rate on Egorov’s position has been brought down to 150% and the interest rate multiplier has been replaced with a discount of 20% for collateral ratios under 40% and premiums of 25% for a collateral of 70%. 

Voting on the new proposal has commenced, with 100% of the community signalling support for the new terms so far. If the majority of votes are in favor by Aug. 6, the new terms will be implemented by the DeFi protocol.