Abracadabra Money Case Study
The Abracadabra Money case study illustrates both the innovation potential and inherent risks in complex DeFi protocols.
Author: Sangamesh Badachi
Executive Summary
Abracadabra Money represents a significant case study in DeFi lending innovation and the risks inherent in complex protocol design. Launched in May 2021 by Daniele Sestagalli, the protocol pioneered the use of interest-bearing tokens (ibTKNs) as collateral to mint Magic Internet Money (MIM), a USD-pegged stablecoin. Despite achieving substantial growth with over $6 billion in total value locked (TVL) at its peak, the protocol has suffered multiple major security exploits totaling over $19 million in losses, highlighting critical vulnerabilities in its smart contract architecture.
Protocol Overview and Innovation
Core Mechanism
Abracadabra Money operates as an omnichain DeFi lending platform built on Ethereum and bridged to multiple networks including Arbitrum, Avalanche, Fantom, and Optimism. The protocol's primary innovation lies in accepting yield-bearing tokens as collateral—assets like yvUSDC (Yearn Vault tokens), xSUSHI (SushiSwap staked tokens), and other ibTKNs that continue earning yield while being used as collateral.
The lending mechanism operates through isolated "cauldrons" built on Sushi's Kashi lending technology, which provides separate risk pools for different collateral types. Users can borrow up to 90% of their collateral value in most cases, with borrowing fees of 0.5% and interest rates typically ranging from 0.8% to several percent annually.
Multi-Token Ecosystem
The protocol operates three primary tokens:
MIM (Magic Internet Money): USD-pegged stablecoin that can be minted by depositing collateral
SPELL: Governance and staking token with 210 billion supply (reduced from 420 billion through a token burn)
sSPELL: Staked version of SPELL that earns protocol fees and governance rights
Financial Performance and Market Position
Total Value Locked Evolution
At its peak, Abracadabra commanded significant market presence with TVL exceeding $6 billion across its ecosystem. However, current TVL has contracted dramatically to approximately $42.46 million as of August 2025, representing over a 99% decline from peak levels. This contraction reflects both market conditions and security incidents that have eroded user confidence.
MIM Stablecoin Metrics
MIM achieved considerable market penetration, becoming the 6th largest stablecoin by market capitalization at its peak. Current circulation stands at approximately 103.8 million MIM tokens with a market cap of $103.72 million. The stablecoin demonstrated significant multi-chain adoption, operating across Ethereum, Arbitrum, Avalanche, Fantom, and other networks.
SPELL Token Performance
SPELL token has experienced severe depreciation from its all-time high of $0.07515 in November 2021 to current levels around $0.0005, representing a decline of over 99%. The token maintains a circulating supply of approximately 165 billion SPELL with a market cap of $84 million.
Security Incidents and Risk Analysis
Major Exploits
Abracadabra has suffered three significant security breaches:
January 2024 Exploit ($6.5 million)
The first major incident involved a precision loss bug in the protocol's smart contracts that allowed attackers to bypass insolvency checks and take inflated MIM loans relative to deposited collateral. The exploit caused MIM to depeg to $0.76 before partially recovering.
March 2025 Exploit ($13 million)
The largest attack exploited state tracking errors in GMX-integrated cauldrons, allowing the attacker to self-liquidate positions while retaining the ability to borrow against non-existent collateral. The multi-stage attack involved:
Intentionally failing GMX deposits to leave tokens in the OrderAgent contract
Self-liquidating positions to wipe collateral records
Using the "ghost" collateral to secure new loans
Extracting 6,262 ETH worth approximately $13 million
Depegging Events
MIM has experienced multiple depegging events beyond those caused by exploits. During the FTX collapse in 2022, MIM fell to $0.95 due to exposure to FTT tokens representing one-third of MIM's collateral backing. Additional depegging occurred in June 2022 amid broader market stress and concerns over protocol solvency, with the stablecoin trading as low as $0.9456.
Risk Factors
The protocol's security incidents highlight several systemic vulnerabilities:
Complex Integration Risk: Integration with external protocols like GMX created attack vectors not identified in audits
State Tracking Vulnerabilities: Inconsistent state management across protocol interactions enabled exploitation
Collateral Concentration Risk: Heavy exposure to volatile or problematic assets amplified depegging risk
Liquidation Mechanism Flaws: Self-liquidation capabilities created opportunities for manipulation
Governance and Leadership
Daniele Sestagalli Background
Founder Daniele Sestagalli, an Italian engineer with expertise in computer science and blockchain technology, has been active in crypto since 2011. Beyond Abracadabra, he co-founded Wonderland Money and Popsicle Finance, creating an ecosystem with combined peak market caps exceeding $6.5 billion.
Sestagalli's leadership faced scrutiny during the Wonderland Money controversy in early 2022, when it emerged that the project's treasury manager was connected to the collapsed QuadrigaCX exchange. Sestagalli's prior knowledge of this connection and his defense of the individual raised questions about due diligence and transparency.
Tokenomics and Governance Structure
SPELL distribution allocates 63% to farming incentives, 30% to the team with four-year vesting, and 7% through initial DEX offerings. The protocol implements a buyback mechanism using liquidation fees and protocol revenue to purchase SPELL tokens from the market, though emissions continue to outpace burn activity under normal conditions.
Competitive Analysis and Market Impact
Innovation in Collateral Usage
Abracadabra's pioneering use of interest-bearing tokens as collateral influenced broader DeFi lending practices, demonstrating how protocols could unlock liquidity from staked or yield-farming positions while maintaining underlying yield generation. This innovation was subsequently adopted by other lending protocols.
Leverage and Capital Efficiency
The protocol enabled sophisticated leverage strategies through "looping" mechanisms, allowing users to recursively borrow and re-deposit to amplify yields up to 10x their initial capital. While innovative, these features also concentrated risk and complexity within the system.
Current Status and Future Outlook
Recovery Efforts
Following the March 2025 exploit, Abracadabra offered a 20% bounty for fund recovery and claimed ability to cover approximately half the losses immediately. The protocol has continued development with recent commits and maintained operations across multiple chains despite reduced TVL.
Ongoing Challenges
The protocol faces several headwinds:
Trust Deficit: Multiple exploits have eroded user confidence and TVL
Token Performance: SPELL's 99%+ decline limits governance participation incentives
Market Competition: Newer lending protocols with stronger security records compete for market share
Regulatory Scrutiny: Stablecoin regulations may impact MIM's operational flexibility
Technical Improvements
Post-incident analysis highlighted the importance of invariant testing and comprehensive failure case analysis for complex DeFi protocols. The protocol has indicated plans for enhanced security measures and continued multi-chain expansion.
Lessons and Implications
The Abracadabra Money case study illustrates both the innovation potential and inherent risks in complex DeFi protocols. While the platform successfully demonstrated novel collateral usage and achieved significant market adoption, security vulnerabilities ultimately undermined its long-term sustainability. The protocol's experience underscores the critical importance of thorough security auditing, especially for systems with complex external integrations, and highlights how single points of failure can cascade across interconnected DeFi ecosystems.
For the broader DeFi space, Abracadabra's trajectory serves as a cautionary tale about balancing innovation with security, the challenges of maintaining decentralized governance during crises, and the difficulty of rebuilding trust following major security incidents. Despite ongoing development efforts, the protocol's ability to regain its former market position remains uncertain given the competitive landscape and persistent security concerns.