Crypto Gloss

Abracadabra Money

Abracadabra Money solved a specific problem in DeFi 2021: if you had deposited USDC into Yearn Finance and received yvUSDC (a yield-bearing vault token appreciating continuously in value), you were theoretically rich but practically illiquid — you couldn’t spend your yvUSDC anywhere, and selling it meant abandoning the yield. Abracadabra let you use yvUSDC as collateral to borrow MIM (Magic Internet Money), a USD-pegged stablecoin — effectively letting you have your yield cake and eat it too: earn ~15% APY on your deposited USDC while simultaneously spending MIM borrowed against it. The protocol was conceived by Daniele Sestagalli, the same developer behind Wonderland Finance and Time stablecoin, who became one of DeFi’s most controversial figures. Abracadabra grew to $6B+ TVL at its 2021 peak, was central to the Terra/LUNA collapse contagion in 2022 (due to its Degenbox strategy leveraging UST), and weathered multiple crises — MIM briefly de-pegging, the Wonderland controversy exposing co-developer “0xSifu” as convicted fraudster Michael Patryn — while surviving and continuing to operate post-bear market as a niche CDP (collateralized debt position) protocol.

Key Facts

  • Founded: 2021 by Daniele Sestagalli
  • Stablecoin: MIM (Magic Internet Money) — USD-pegged, overcollateralized
  • Governance token: SPELL (Spellbound governance and fee distribution)
  • Collateral types: Interest-bearing tokens (yvUSDC, yvETH, stETH, xBOO, xJOE, etc.)
  • Chains: Ethereum, Arbitrum, Avalanche, Fantom, BSC
  • Peak TVL: ~$6.5B (January 2022)
  • Protocol mechanism: Collateralized Debt Position (CDP), similar to MakerDAO but with yield-bearing collateral

Core Mechanism: Borrowing Against Interest-Bearing Collateral

Here’s how this works in practice.

The Problem Abracadabra Solves

Standard DeFi lending (Aave, Compound) allows borrowing against ETH, BTC, or stablecoins. But these are “inert” collateral — they sit idle securing your loan, earning nothing.

By 2021, DeFi yield aggregators (Yearn Finance, Convex Finance, Beefy Finance) had created a parallel economy of interest-bearing receipt tokens:

  • Deposit USDC into Yearn → receive yvUSDC (represents your share + accumulated yield)
  • Stake CRV on Convex → receive cvxCRV (earns 3CRV rewards + CVX)
  • Stake ETH on Lido → receive stETH (earns ETH staking rewards)

These receipt tokens accrue value over time but have very limited use — most DeFi protocols don’t accept them as collateral.

Abracadabra’s Solution

Abracadabra accepts interest-bearing tokens as collateral and mints MIM against them:

  1. User deposits: e.g., 10,000 yvUSDC (worth $10,000 of USDC + yield)
  2. Borrow MIM: At 75% LTV, borrow up to 7,500 MIM (= $7,500 USDC equivalent)
  3. Collateral continues earning: The yvUSDC in Abracadabra continues earning Yearn vault yield (the interest-bearing property is preserved even when locked as collateral)
  4. User has: 10,000 yvUSDC (still accruing ~12% APY on $10,000) + 7,500 MIM to spend/invest

Net effect: Leveraged exposure — the user earns yield on $10,000 while having access to $7,500 in liquid capital.

Interest and Liquidation

  • Borrow fee: Flat one-time fee on borrow (0.5-1%) rather than continuous interest — important distinction from Aave’s continuous variable interest
  • Interest rate: Low (0.5-10% annually depending on collateral type and chain)
  • Liquidation: If collateral value falls relative to MIM debt (based on oracle price of underlying asset), the position is liquidated — collateral sold to repay MIM

MIM: Magic Internet Money

MIM is Abracadabra’s native stablecoin, designed to maintain a $1 USD peg:

Peg maintenance mechanism: Soft peg via arbitrage incentives (MIM >$1: borrow MIM and sell; MIM <$1: buy MIM and repay cheapest debt). Hard peg via protocol-level redemption mechanisms (less robust than MakerDAO's PSM).

Supply mechanism: MIM is minted by the protocol when users borrow against collateral; burned when positions are repaid.

MIM de-peg events:

  • January 2022: MIM briefly fell to $0.94 during the Wonderland/0xSifu controversy (Daniele co-developer revealed as convicted fraudster under pseudonym 0xSifu). Market lost confidence in the team → large MIM sellers → de-peg. Recovered to $1 within weeks.
  • May 2022: MIM fell to $0.97 during Terra LUNA collapse (Abracadabra had significant UST exposure via Degenbox strategy — see below). Partially de-pegged, recovered slowly.
  • January 2023: MIM briefly dipped to $0.96 due to Multichain bridge exploit concerns (major MIM bridge was Multichain). Recovered.

Degenbox: The Controversial Leveraged Strategy

The approach is detailed in the sections below.

What Degenbox Was

Degenbox was an automated leverage strategy built on Abracadabra’s infrastructure for UST (TerraUSD) stablecoin:

  1. Deposit UST into Abracadabra
  2. Borrow MIM against UST collateral
  3. Swap MIM for more UST in Curve’s MIM/3CRV pool
  4. Re-deposit UST as more collateral
  5. Repeat (up to ~10x leverage)

The resulting position earned: UST yield (Anchor Protocol’s 19.5% APY) × leverage factor = theoretically 60-100%+ leveraged UST APY.

Why It Was Controversial

LUNA/UST concentration risk: Degenbox created massive concentrated exposure to UST — when UST began de-pegging in May 2022, Degenbox users faced cascade liquidations:

  • UST fell below $1 → Abracadabra’s oracle recognized UST collateral as worth less → liquidations triggered → Degenbox positions liquidated → more UST selling pressure → deeper de-peg → more liquidations

$13M bad debt: The cascade was so fast that Abracadabra couldn’t liquidate positions efficiently before collateral value fell below MIM debt — resulting in ~$13M in bad debt that MIM holders effectively absorbed (MIM supply > collateral backing by $13M).

Systemic contribution: Degenbox, with its concentrated UST/MIM leverage, contributed to the LUNA/UST de-peg spiral — one of DeFi’s largest systemic failures.

SPELL Token

Governance: SPELL holders vote on collateral additions, risk parameters, fee structures, and treasury management.

Revenue sharing: Abracadabra charges fees (borrow fee, liquidation penalties) — a portion of these fees goes to SPELL stakers via the sSPELL mechanism. SPELL holders stake SPELL → receive sSPELL → accrue protocol fees over time (paid in MIM or ETH).

Peak SPELL price: $0.014 (November 2021) during DeFi peak; fell 98%+ in bear market.

Post-Crisis Survival

Despite multiple near-death experiences (MIM de-pegs, Wonderland controversy, Degenbox implosion, Multichain bridge concerns), Abracadabra survived the 2022-2023 bear market, albeit at much reduced scale:

  • TVL fell from $6.5B to ~$200-400M
  • SPELL token value fell 95%+
  • Daniele Sestagalli remained as lead developer despite community controversy
  • Core mechanism (MIM borrowing against interest-bearing collateral) continued functioning

Social Media Sentiment

Abracadabra (MIM) is forever associated with the Wonderland/TIME collapse in early 2022 that devastated its TVL and MIM’s peg. CT sentiment is mixed to skeptical — the protocol continues to operate but lost its lead in the collateralized debt position space. SPELL token has never recovered to its 2021 highs. The protocol is seen as a cautionary tale about leverage and governance in DeFi.

Last updated: 2026-04

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