Are Ethereum and DeFi Crashing? We saw these phenomena in the DeFi stress test
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Author: Pan Zhixiong, Lianwen Research Director, published with authorization.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, Author: Pan Zhixiong, Lianwen Research Director, published with authorization.
That's right, in your lifetime, fortunately, in the past week, a group of black swans flew by, all kinds of assets around the world have suffered severe shrinkage, and the cryptocurrency market has not been spared. On March 12, Bitcoin saw its largest drop of 50%, and Ethereum and other altcoins also experienced bloody storms.
The violent market turmoil has put many infrastructures through a stress test. Many netizens reported that several major exchanges experienced different degrees of withdrawal closures, transaction freezes, downtime and other failures amidst market fluctuations. At the same time, the liquidation mechanism of various DeFi platforms in Ethereum during the price plunge has also made the entire Ethereum network bloated and congested, and transaction fees are hundreds of times higher than usual.
The performance of the decentralized finance project, which is regarded as the most important innovation in the cryptocurrency industry, in this fierce stress test is quite worrying. The one that has received the most attention is MakerDAO, a mortgage lending platform on Ethereum. MakerDAO is the underlying infrastructure in the DeFi ecosystem. The USD stablecoin DAI issued by it is an important cornerstone of the Ethereum DeFi ecosystem, and its every move has been carefully studied by the entire DeFi community.
Bad news: MakerDAO generated more than $4 million in distressed debt during this stress test, and for the first time needed to recapitalize by auctioning MKR to pay off these undercollateralized distressed debts.
Looking at it now, it is still too early to say that each DeFi project has passed this stress test. However, this is a rare real-fire exercise to detect possible systemic risks in the DeFi ecosystem. According to some currently available public data and tools, we have some observations and discoveries in this extreme market:
The first large-scale on-chain liquidation stress test: All DeFi projects in Ethereum liquidated more than $23 million in assets on March 12. Among them, the MakerDAO system generated the most liquidations, worth more than 10 million US dollars, mainly ETH.
Dai once had a premium of 10%: DAI is mainly issued after staking ETH, so when the price of ETH plummets, many mortgagors will buy DAI from the market to close the mortgage position to prevent ETH from being liquidated, which also indirectly increases the value of DAI. In terms of price, the premium of DAI in the OTC market once exceeded 10%.
Smart contract Gas consumption may become an important reference for selecting DEX: Among all DEXs, Uniswap consumes the least Gas because of the simple logic of smart contracts, which means lower transaction costs, making Uniswap the DEX with the highest daily transaction volume .
DEX volume hits new highs: DEX volumes hit new highs despite Ethereum network fees doubling, and aggregators such as 1inch and ParaSwap also hit record volumes.
The stablecoin USDC has become a safe haven: In the transactions of the stablecoin trading agreement Curve, more people use USDC as the main safe-haven stablecoin, and it is possible to use it for fiat currency withdrawal; in addition, the transaction volume of DAI is also very high. It is likely to be used in the behavior of closing mortgage positions; USDT has the second largest transaction volume, while TUSD and BUSD are almost uninterested.
The risk hedging mechanism on the chain is on the rise: the decentralized options platform Opyn can be used to hedge risks, and the new mortgages in a single day have reached a new high; the most mortgages are used to protect the cDAI assets in Compound.
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The largest chain liquidation in the history of DeFi
Ethereum and the DeFi ecosystem are experiencing the largest chain liquidation in history. Before these black swans flew by, the entire cryptocurrency market was full of praise for the development prospects of DeFi, because the DeFi ecology has taken root and grown rapidly in Ethereum.
The latest data from the data analysis platform DappRadar shows that the number of active users of Ethereum DeFi applications in February this year increased by nearly 3 times compared to the same period last year, while the total dollar value of ETH and ERC-20 tokens in all DApps increased by nearly 7 times. According to DeFi Pulse data, the value of US dollars locked in DeFi platforms exceeded US$1.2 billion in February this year, doubling from the end of last year.
However, since most DeFi platforms use ETH as a mortgage asset, and ETH itself is a highly volatile asset, the sharp drop in the price of ETH has forced many DeFi protocols to initiate a liquidation mechanism, that is, sell mortgaged assets to reduce losses. Even MakerDAO was forced to carry out large-scale liquidation, which was about 3 times the mortgage rate of Ethereum.
DeFi Pulse data shows that on March 13, the lowest point of DeFi locked value was close to 250 million US dollars, and then recovered to more than 600 million US dollars.
According to statistics from DeBank, a total of $23.45 million was liquidated throughout the day on March 12, and MakerDAO’s collateralized debt positions liquidated more than $10 million, followed by Compound and dYdX.
The increase in clearing transactions has driven the transaction fees on the Ethereum chain to increase hundreds of times, and has intensified the difficulty of clearing major DeFi protocols.
Usually, the unit price of Gas in the Ethereum network is only 1 Gwei, and it will increase to single digits at most. According to the data of Etherscan and ETH Gas Station, on March 12, the unit price of Gas increased to an average of 200 to 300 Gwei, with a maximum of 600 Gwei. We observed that even transactions exceeding this unit price may not necessarily be packaged by miners.
This means that the transaction fee on the Ethereum chain has increased hundreds of times, which undoubtedly further increases the difficulty of the liquidation process. For example, based on a gas fee of 200 Gwei, a DAI repayment operation on MakerDAO is equivalent to paying about $5.
At the same time, the transfer of the entire ERC-20 token was congested. Since many tokens in centralized exchanges are ERC-20 standard tokens circulating in Ethereum, and because of transaction costs, users have begun to restrict withdrawals. Users of centralized exchanges are unable to withdraw cash, causing many rumors in the market, affecting the confidence of currency holders and further increasing market turmoil.
Obviously, the performance problem of Ethereum has become a fatal bottleneck in the DeFi risk management system.
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MakerDAO to Auction First MKR to Pay Off Collateralized Debt
MakerDAO will conduct the first MKR auction in history to repay mortgage debt due to a $4 million shortfall in the auction process.
The issue of bad debts is actually considered in the MakerDAO white paper. According to the plan, MakerDAO must recapitalize, and the next step will be to launch a "debt auction" for the governance token MKR. This will be the first time in MakerDAO's history that MKR will be auctioned to repay under-collateralized bad debts.
On the other hand, the creator of DAI, that is, the holder of the mortgage debt position, buys DAI and closes the mortgaged debt in exchange for ETH, so as to avoid these ETH being liquidated and auctioned by the system, which is the main reason why the market price of DAI is raised one.
MakerDAO has just announced the details of the auction. The debt auction will start at 6:25 am EST on March 19th and is open to anyone. Participants must run the Auction Keeper open source software to participate in the auction bidding.
The auction process is as follows: the first MKR auction price starts from 200 Dai, and a total of 250 MKR (representing 50,000 Dai) is sold, and the next auction also corresponds to 50,000 Dai, but the bidder can only get 230 MKR, which is equivalent to 217 The price of Dai/MKR. If no one bids 250 MKR for the first auction, the auction will restart three days later, with 50,000 Dai corresponding to 300 MKR, or 166.66 Dai per MKR. Eventually, the auction ends if there is at least one bid and no higher bid is made within 6 hours.
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Paradigm and Dharma will participate in "Save the Maker"
Come to the rescue! Investment institution Paradigm and DeFi project Dharma will participate in the MakerDAO auction to repay the shortfall.
The DeFi project Dharma also stated that it is organizing a DeFi ecosystem stakeholder group to support the repayment of the debt incurred this time.
Although the premium of DAI is obvious, due to the congestion of the Ethereum network, DAI cannot be circulated well.
During the market turmoil on March 12th and 13th, the price of DAI in over-the-counter trading was at a premium of more than 10% to the price of the US dollar, and in decentralized exchanges, the price of DAI was at a premium of more than 10% compared to USDC , and the minimum is 5%.
About 60% of the users who originally held DAI were stored in the DAI savings account (DSR), earning an annualized interest rate of 8%. After this DAI liquidity risk emerged, more than 25 million DAI were withdrawn to the market circulation. Even so, the premium of DAI remains high.
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DEX trading volume hits new high
The paradox is that although the transaction fees on the chain have increased sharply, people are using DEX more, and the transaction volume has increased significantly.
Based on the data of 1inch, a DEX aggregation trading tool, the trading volume on March 12 broke the record again to reach 8.53 million US dollars, even close to twice the second highest in history. On March 13, it broke the historical record again, surpassing 10 million US dollars.
1inch has aggregated more than 10 DEXs, and it will help users choose the DEX with the most suitable rate for trading. Judging from the transaction distribution of 1inch yesterday, Uniswap has the highest proportion, followed by Kyber and Curve, and the others are relatively small.
Another similar aggregation trading platform, ParaSwap, also broke historical records, with a single-day trading volume of 2.31 million US dollars.
Why did Uniswap break through Kyber and become the DEX with the highest trading volume in this slump?
One possible answer is that Uniswap has the lowest "gas consumption" when executing smart contract operations, that is, the transaction cost is an order of magnitude lower.
In fact, you don’t need to pay special attention to “Gas consumption” at ordinary times, because the unit price of Gas can be set to 1 Gwei, and the transaction fee may be 1 USD or less. However, this time the unit price of Gas on the Ethereum network has been increased by hundreds of times, and the transaction fees of many DEXs when performing on-chain operations may be tens of dollars or even higher.
1inch has a more thoughtful function, which will estimate the network fee cost of each DEX for users. Among them, the Gas consumption of Uniswap and Oasis is significantly lower than that of other DEXs. That is to say, under the premise of the same Gas unit price, Uniswap's "Gas consumption" is an order of magnitude less than other DEXs. If Uniswap's network fee is $1, then Oasis is about $2, while other DEXs such as Kyber and Curve are close to $15.
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The last transaction on ParaSwap was close to the $62 network fee, in which the Gas price was set to 310 Gwei, and even if submitted, it is likely not to be packaged
Curve is a DEX that focuses on stablecoin transactions. It supports 5 mainstream tokens: DAI, USDC, USDT, TUSD and BUSD. From the perspective of Curve's transaction volume, DAI and USDC account for the vast majority of transaction volume, USDT's transaction volume is slightly less, and TUSD and BUSD have almost no transaction volume.
Moreover, in Curve, DAI is more expensive than USDC (5%-10%), which shows that DAI is a real rigid demand. Many people are collecting DAI through Curve, and then go to Maker to close their mortgage debt positions. This also means that more people use USDC as a safe haven for DAI than USDT. Although USDC is issued through a centralized custody mechanism, it is a compliant and legal token that can be withdrawn to Coinbase or Circle and exchanged for real US dollars.
The margin DEX platform dYdX has raised the transaction limit of the platform twice to deal with this unexpected situation.
The transaction limit was raised to 10 ETH or 2000 DAI for the first time, and to 25 ETH or 5000 DAI for the second time. Because if the transaction limit is not increased, the transaction amount may not be comparable to the network fee expenditure of Ethereum.
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On-chain hedging risk platforms are on the rise, and the amount of mortgages on the Opyn platform has broken records.
Opyn is a put option platform based on Ethereum. Put options can also be used as insurance, as a risk hedging mechanism when prices fall. Users can mortgage their ETH in Opyn, and then mint put option tokens, such as ocDAI, which can be used to hedge the risk of cDAI in Compound.
The minted ocDAI can be sold to the market to earn royalties. For users who buy ocDAI, if the price of cDAI falls to zero or plummets, they can send ocDAI and cDAI to the Opyn contract to get the ETH in the mortgage.
On March 12, the value of stakes on the Opyn platform increased by $93,000 in a single day, bringing the total amount staked to $410,000. The most minted put option tokens are ocDAI, which means that option generators will provide the market with more cDAI put options to resist the risk of cDAI bankruptcy.
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The performance bottleneck of Ethereum needs to be solved urgently
