The plunge has brought a big test to DeFi, or it may indicate the future direction of the multi-chain structure of Ethereum, Polkadot, etc.
You must still remember the 519 tragedy. It is hard to forget this day if you are an insider. After all, this is an epic waterfall that can be "as famous" as 312.
You may have also heard about the embarrassment that XVS encountered on the day of 519. XVS encountered an "epic" liquidation, andIn essence, this liquidation has almost nothing to do with the plunge on 519.
The thing is like this, as we all know that Venus can mortgage XVS, and the mortgage rate of lending assets such as BTC or ETH is 80%, and the liquidity of XVS is actually much worse than that of mainstream currencies. A large household discovered this "loophole" and performed the following operations:
1. Tens of millions of dollars were spent in a short period of time, bringing down the price of XVS from $70 to $140.
2. High mortgage XVS lent 4,000 BTC and tens of thousands of ETH.
3. Run away.
4. Let the XVS price drop rapidly to start liquidation.
5. Due to insufficient liquidity, XVS cannot be liquidated in a short period of time, causing bad debts of hundreds of millions of dollars to the XVS platform.
According to a community member, millions of XVS waiting to be liquidated were hung there at a low price, and it took more than ten hours for the liquidated person (most likely a robot) to slowly buy them all.
So it led us to think like this:In the current multi-chain universe, can each chain really run a complete DeFi financial system independently?Including exchange, lending, stable currency, synthetic assets.
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01 Liquidation everywhere
Liquidation is something you normally don't notice at all, because it really doesn't happen very often. However, when the extreme market comes, liquidation is everywhere.
Take the basic four-piece set of DeFi: exchange, lending, stable currency (here specifically refers to Defi’s native encrypted collateral stable currency, such as DAI, LUSD, etc.) and synthetic assets. You will find that in addition to exchange, the other three have clearing mechanisms as their core components.
Simply put, no liquidation, no DeFi.Every extreme market, such as 312 and 519, is equivalent to a big test of the liquidation mechanism of each project, and even the "health" of the entire DeFi system.
The liquidation of each platform is different. For example, MakerDAO is an asset auction mechanism. Compound and AAVE are liquidators who directly take over the debtor’s position at a discounted price. The recent stablecoin rookie Liquity LUSD has set up a triple liquidation (stable pool, debt warehouse) Transfer, global liquidation) mechanism, interested friends can check it out by themselves, so I won’t talk about it here.
However, no matter what liquidation mechanism is used, there are three basic steps that cannot be avoided:
1. Discount on assets pending liquidation.
2. The liquidator buys the debt at a discount.
3. The liquidator sells the debt bought at a discount.
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02 312 MakerDAO Liquidation Failed Simple Review
Like miners, liquidators are a group of people who are economically incentivized. Liquidation assets are sold at a discount after all,As long as you grab it and sell it in a short enough time, it's an almost surefire deal.
They are always looking at the assets in projects such as MakerDAO, Compound, AAVE, and Liquity that meet the liquidation conditions or are close to liquidation, and when the liquidation occurs, they will rush to it. It's like a group of vultures staring at a dying rabbit. When it falls down, they will see who can swoop faster and catch it more accurately.
I guess it is not difficult for you to imagine, how could this kind of thing be stared at by human eyes, it must be countless well-written robot programs, which are constantly monitoring there.
Ethereum is a dark forest, in which there are not only various arbitrage robots lurking secretly, but also various liquidation robots on standby at all times, Even many liquidation robots will use advanced tools such as flash loans to carry out zero-risk liquidation (use your own money to buy discounted assets and then try to sell them at the original price, there is a risk of "making ends meet" during the rapid price decline).
So why did 312MakerDAO end up winning the auction at a price of 0 yuan, thus accumulating millions of bad debts? The main reason is that the gas cost of ETH has exceeded 1000gwei (1 ETH = 10^9Gwei) at that time, which led to two consequences:
1. In MakerDAO's auction mechanism, the most congested is that many exchanges whose bids are higher than 0 are not packaged due to insufficient gas fees.
2. More importantly, many liquidation robots stopped under such high gas conditions. It is not difficult to understand that robots are profit-seeking. When the Gas fee is too high, exceeding the asset discount price, or the Gas cost for each liquidation failure is too high, many robots will "stop".
This is the same reason that every time the price of BTC falls below the "shutdown price" of many mining machines, the mining machine shuts down.secondary title
03 The liquidation depth problem exposed by XVS
312 is exposedMakerDAO's 'Liquidators Bought' Discounted Debt' on ETHThe problem in this step, what 519 exposes is'Liquidators sell' debt bought at discount, XVS hits BSCThe problem with this step.
To put it simply, when the $80 XVS was discounted to 70 and was bought by the liquidator, the liquidator found that due to slippage and depth problems, it could only be sold for 65 when the volume was large, which was embarrassing...
This is also the original calculation of the big XVS wool player.Under the premise that I have enough XVS in my hand, I want to ship, and the depth of the market cannot bear my "smashing the market", mortgage XVS to the system, which is equivalent to selling at 80% of the highest price (XVS mortgage rate) All the XVS on hand, and the receivers are all liquidators + the bad debts of the system itself caused by the inability to liquidate.
This has sparked a lot of discussion, especiallyXVS is a less liquid asset, and the mortgage rate of 80% is too high, which caused the bad debt incident. If the mortgage rate is 50%, these problems may not happen at all.
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04 Liquidation and blockchain finality in the multi-chain universe
You see, the liquidator Or liquidation robot is essentially driven by interests.
Therefore, you need to ensure that after he buys the collateral that is liquidated at a discounted price, he can immediately find a platform (usually Dex) to sell the collateral at a price higher than his purchase price to ensure that the liquidator makes a profit.
Originally we only had one Ethereum, we had Uniswap, we never worried about the depth of WBTC, ETH and some mainstream Defi currencies, so no matter Compound, MakerDAO, AAVE, everyone never worried about "liquidator selling" at a discount What's wrong with this step.
However, the XVS incident reminded us that even if only BTC and ETH are accepted as collateral, in the multi-chain universe, are our BTC and ETH enough?
You see, we already have ETH, EOS, TRX, BSC, HECO, Solana, Fantom, Cosmos, Polkadot, Avax... these are just the main chain.
L2 or side chains, we have Loopring, Xdai, Matic, just now the Rollup family has launched Arbitrum, there will be Optimism in two months, and we will see ZkSync, Startware, Aztec in a few months without accidents...
It seems that I have not counted some unpopular main chains such as Waves, Ada, the older generation of NEO, Quantum, IOST, etc...
If we think that the endgame of the blockchain, or at least in recent years, will be such a multi-chain universe dominated by heroes.
In your opinion, how likely are the four major elements of DeFi to run on each chain: exchange, lending, stable currency, and synthetic assets? As far as liquidation is concerned, the following must be met:
1. There are BTC, ETH, or DEX with mainstream collateral on this chain
2. The LP pool of this DEX is deep enough
3. DEX has to have enough LPs. That’s right, many LPs of mainstream pairs on these chains are provided by a few big players. Once liquidation happens or before it happens, what should they do if they withdraw from the pool?
According to this standard, to put it bluntly, few of the dozens of chains listed above can meet the requirements.
If you think that DeFi will be the future of the blockchain (at least for now it is indeed the case), then deduced according to the Defi standard, especially from the perspective of liquidation, the end result of the blockchain multi-chain universe in a few years is nothing more than the following indivual:
1 Multi-chain universes coexist.
Theoretically speaking, if L2 enters and exits L1 fast enough, and there is a sufficiently perfect multi-chain universe cross-chain mechanism, then the problem of insufficient depth of single-chain DEX when black swan-level liquidation is triggered can be liquidated by "moving bricks" from various other chains Solved by robots.
Because this shares the overall liquidity of the multi-chain universe to a certain extent, but it is only a theory. With so many chains with different standards, it is too difficult to get through quickly and perfectly in practice.
21,000 chains are normalized to ETH.
One chain + one L2, ETH enters the era of L2 Rollup + 2.0 sharding, TPS and GAS are no longer a problem; RollupL2 completes the big business of eating chicken, leaving the most capable Rollup KO for all other Rollups, and depth is no longer a problem. From the perspective of liquidation, this should be the most "comfortable" mode.
22,000 chains are normalized to ETH.
One chain + multiple L2, ETH entered the era of L2 Rollup + 2.0 sharding, TPS and GAS are no longer a problem; Rollup L2 Warring States era, severe fragmentation, but found a way to get through each Rollup, such as state channel or aggregator, the depth is in This case is also OK. For liquidation, the complexity must be higher than 2.1 and lower than 1.
30,000 chains are normalized to Polkadot.
From the perspective of liquidation, Polkadot has two major advantages. First, in terms of underlying design, ETH liquidation requires a TX to trigger, while Polkadot can achieve direct liquidation.
The second is the standardized multi-chain of the Polkadot parachain, which has a common interface. In terms of the depth of multi-chain interoperability and sharing, it is much more practical than the first heterogeneous cross-chain that coexists in the multi-chain universe. Compared with 2.2, it also has advantages. The opponent should be the 2.1 scene.
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05 Summary
One last word about liquidation,Uniswap V3Market making by LPs (liquidity providers) that provides granular control provides N times higher capital efficiency than Uniswap V2, but if you think about it the other way around, in a large range, V3 theoretically means lower than Uniswap V2 N times the depth.
When there is a massive liquidation in the black swan extreme event... more and more like Wall Street: the higher the efficiency, the bigger the bubble.
