Black Thursday in Crypto: The Good, the Bad and the Ugly
Editor's Note: This article comes fromFirst class warehouse blockchain research institute (ID: first_vip1)Editor's Note: This article comes from
First class warehouse blockchain research institute (ID: first_vip1)
, Author: Emilio Frangella, translation: Tracey_First Class Warehouse, reproduced by Odaily with authorization.
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From March 12th to 13th, the price of ETH fell, source: glassnode
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DeFi has never experienced such a big scene, and the combination of DeFi has been pushed to unexpected tests. A very critical test unfolds, especially for Aave. Aave has only been in operation for two months, and with such explosive growth in such a short period of time, the strain on emergency procedures can only be imagined. What were the results of the stress test? What lessons can be learned?
DeFi aspect
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good
It is a huge miracle that DeFi survived. Looking at the big picture, we have witnessed the rapid response of the protocol to a series of events, adapting to the extreme conditions of the settlement layer caused by the original demand for block space. In fact, users are willing to pay up to 400+ gwei gas fees to submit transactions, which is good. In other words, even if you pay a high fee, the transaction still has positive returns. In other words, DeFi is an ecosystem with great demand, and it will continue to exist.
Aave aspect
Aave has sprung up in this currency price crisis. Flash loans have exploded due to timely integration with DefiSaver, which allows Maker Vault owners to self-liquidate or automatically deleverage their positions. As users used the DefiSaver function to deleverage CDPs, the total amount of flash loans in ETH soared from 270 ETH to 12,500 ETH in just a few hours.
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The rapid growth of flash loans has brought a positive result: within 24 hours, depositors’ returns increased by 8.5 times. In other words, depositors store ETH in Aave to obtain an annualized rate of return of 12%. Although this extreme flash loan transaction volume is determined by the market and it is difficult to continue, Aave still brings the highest rate of return to ETH depositors in the entire DeFi field.
Due to the emergence of flash loans, Aave currently has the highest depositor yield (0.2%) in the ETH market
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Another positive result is that the protocol achieved its highest fee to date, reaching 114 ETH, equivalent to $14,500, in just 24 hours. This is partly due to flash loans and partly due to users repaying their positions to avoid liquidation. Even though users urgently repaid their loans, the total amount of loans in the agreement continued to rise.
Aave Borrowing and Repayment Today
DeFi aspect
Disadvantages
DeFi aspect
This currency price crisis reflects that the current DeFi ecosystem is too large for the current settlement layer. We need Ethereum to expand, because when the bottom layer is blocked, it is difficult for the DeFi protocol to work properly, and as DeFi grows, the protocol will become more and more complex. For example, analyze the oracle problem. The most important thing for DeFi (especially lending protocols) is to quote the correct latest price. In this way, users can trigger liquidation in time to avoid loss of funds. Due to sudden increases in fuel prices, it is difficult for oracle operators to maintain up-to-date prices. In particular, while the MakerDAO oracle was reporting invalid ETH/USD prices for multiple hours, the oracle operator was dealing with a situation where transactions were chaotic due to a sudden increase in network demand. This caused a lot of confusion for multiple participants in the system (users, admins, refinance apps) and ultimately caused Maker to lose over $4 million in collateral in a zero-bid auction.
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The second negative is that many users are unable to adjust their positions due to congestion, and managing CDPs is notoriously difficult, and even the most cautious users can be caught off guard by sudden price drops. As a result, even users who are theoretically able to keep their positions will be liquidated in the end, and it is best to put an end to this situation forever. Therefore, we need to design more sophisticated tools to avoid network congestion and allow users to trade with their own collateral with peace of mind.
Aave aspect
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Black Swan event on Thursday, March 13, with $550,000 in liquidated funds
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This is not to blame for Chainlink, it is caused by the internal mechanism of the Ethereum network, and this is also a problem that needs to be solved urgently. As usual, the highly professional Chainlink team worked through the night and the system gradually returned to normal. In summary, Chainlink’s oracle infrastructure performs better in oracle networks using DeFi protocols. But this is not enough, we need to work hard to build an oracle network that is highly stable even in extreme situations. We are not there yet, but for sure, Chainlink will provide the best oracle experience on the market.
DeFi aspect
scandal
DeFi aspect
In this encryption crisis, many "scandals" broke out. In the first scandal, Maker lost more than 4 million collateral due to flaws in the design of the Maker auction system. Combined factors (not enough administrators to maintain the system, network congestion, lack of liquidity) plus administrators can start auctioning collateral from 0, allowing administrators to quote 0 to liquidate certain vaults, eventually resulting in free collateral and heavy system losses .
0-Price Auction on MakerDAO
This triggered a series of reactions from MakerDAO. First, it auctioned the mined MKR to make up for the debt of the agreement. To make a contingency plan, the Maker system mines MKR and sells it on the open market to cover bad debts. It also caused many Vault owners to rush into the market, grabbing DAI to close their positions. As a result, the price of DAI soared, once approaching $1.1. To this end, Maker immediately reduced the DSR from 4% to 0%, and the stability fee from 4% to 0.5%, stimulating the minting of DAI. However, this is not enough. Due to the uncertainty of Maker, users do not have enough motivation to open new vaults and mint DAI. As a result, Maker was forced to urgently stake USDC, a centralized, permissioned stablecoin, as collateral. Although it was an emergency plan to help Maker stabilize the token exchange rate, it has attracted a lot of attention in the DeFi community due to the increased risk of centralization.
The second scandal is the crazy liquidation caused by multiple DeFi agreements.
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On March 13, more than $10 million in debt was liquidated in the form of Compound and DyDx
Although this is not DeFi's fault, as builders, we need to improve the system and help users avoid losses.
Maker is not the only platform suffering losses. Due to the sudden drop in price, both DDEX and Nuo suffered small losses, which were borne by their respective insurance funds.
Even though it is not a DeFi platform, the centralized exchange BitMex also posted losses.
Aave aspect
How is the situation on the Aave side? The Aave protocol has also suffered some (small) losses. Specifically, there are currently 3 unsecured debt positions totaling $7,001. The losses are as follows:
0x47c25e17ad64ddc7900013cd4a6d94a90eecc94e: Lost 4071 USDC.
0xa6cf7545af8caaea4ad27ed90e3017b3f6ac93ce: Lost 500 USDC.
How was the loss caused? The reason was that liquidators were not liquid enough during the second sudden price drop on March 12-13. When the ETH price reached $95, there were not enough active liquidators on the platform to liquidate all positions. So these three positions are left with health values (the value on Aave that represents how "healthy" the loan is) below the threshold for undercollateralization, in a way where the collateral is not worth enough to cover the amount borrowed Plus liquidation bonuses, so liquidators have no incentive to liquidate. We started liquidating manually, but because of the way the liquidation system works, any liquidation bonuses that are not covered are treated as a debt to the platform.
Since we (Aave) are liquidating undersecured loans, we can use the liquidated collateral and remaining liquidation incentives to cover bad debts, so no actual losses occur. Moreover, the liquidation system itself does work exactly as designed. The reason for the notional loss is the lack of liquidators, or more specifically, the "liquidator" ecosystem is not large enough to fully overcome this crisis.
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How to prevent this from happening again?
This crypto crisis has taught us a good lesson. Overall, we are quite happy with the execution of DeFi protocols, but there is room for upside in mitigating such extreme events. Over the next few weeks, we will be improving the liquidator ecosystem in the following ways:
Release liquidation UI. While normally, users cannot liquidate through the UI (as bots are faster than manual in most cases), the UI can bring non-technical users into the network of liquidators in cases of extreme network congestion Come.
